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The Statement of Cash Flows

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A Historical Perspective on the Statement of Cash Flows

In 1987, the Financial Accounting Standards Board (FASB) issued an accounting standard, FASB Statement no. 95, requiring that the statement of cash flows be presented as one of the three primary financial statements. Previously, companies had been required to present a statement of changes in financial position, often called the funds statement. In 1971, APC Opinion no. 19 made the funds statement a required financial statement although many companies had begun reporting funds flow information several years earlier.

The funds statement provided useful information, but it had several limitations. First, APB Opinion no. 19 allowed considerable flexibility in how funds could be defined and how they were reported Read more

Sales warranties

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Sales warranties – the Case: Example on recognising and measuring provisions

A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms of the contract for sale, the manufacturer undertakes to make good, by repair or replacement, manufacturing defects that become apparent within three years from the date of sale. On the basis of experience, it is probable (ie more likely than not) that there will be some claims under the warranties.

Considerations Sales warranties

Present obligation as a result of a past obligating event—the obligating event is the sale of the product with a warranty, which gives rise to a legal obligation. Sales warranties

An outflow of resources embodying economic … Read more

Insurance modelling

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Insurance modelling – The estimates of future cash flows should incorporate all reasonable and supportable information available without undue cost or effort about amount, timing and uncertainty of those future cash flows. To accomplish this, an entity should estimate the expected value of the full range of possible outcomes. Estimates and assumptions should be unbiased (that is, neither conservative nor optimistic).

The objective of considering the full range of all possible outcomes is to incorporate all reasonable and supportable information. An insurer is not required to identify every possible scenario. Explicit scenarios are not required if the result meets the objective. However, a single scenario based on the most likely outcome or the more-likely-than-not outcome would not Read more

Measurement under IFRS

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Measurement under IFRS is still diverse and sometimes inconsistent. Here is a summary of current measurement practices in IFRS and areas for improvement.

The standards for which the IASB is responsible – International Financial Reporting Standards (IFRS) – are one collection of financial reporting practices. They are increasingly important because of the growing number of companies around the world (especially listed companies) that are required to comply with them, and the growing number of countries that model their own more general financial reporting requirements on them. Measurement under IFRS

IFRS incorporates and builds on the accumulated, often inconsistent practical solutions devised by national standard-setters to deal with financial reporting problems that have emerged over many years, solutions Read more

Deferred tax assets Future tax profits

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The availability of future taxable profits – a problem in four parts Deferred tax assets Future tax profits

The best starting point for determining the availability of future taxable profits is a company’s own business planning cycle and resulting forecasts. Using the company’s forecasts to assess the value of assets with potentially significant impact is not a unique exercise for most telecom operators. Given the significant balances of goodwill, other intangible and tangible assets, impairment testing is an important element of their financial reporting process. Deferred tax assets Future tax profits

Impairment tests generally are based on approved budgets, which result from a robust budgeting process, and often external experts are involved throughout the impairment process. Often, Read more

History of intangible assets

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History of intangible assets – In November 1983, the International Accounting Standards Committee (IASC) approved the International Accounting Standards IAS 22 ‘Accounting for Business Combinations’ that contained the principles for accounting for goodwill. IAS 22, being concerned with business combinations, does not define goodwill. It also does not address the issues of revaluation of goodwill as well as accounting for internally generated goodwill.

For the purpose of improved international accounting standards (IASs), the IASC issued exposure draft (ED 32) “The Comparability of Financial Statements” in January 1989. ED 32 proposed amendments to IAS 22 as well as other IASs. The draft defined goodwill as the difference between the cost of acquisition and the fair values of net … Read more

Service Concession Arrangements

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Illustrative examples Service Concession Arrangements

These examples accompany, but are not part of, IFRIC 12.

Example 1: The grantor gives the operator a financial asset

Arrangement terms Service Concession Arrangements

IE1 The terms of the arrangement require an operator to construct a road—completing construction within two years—and maintain and operate the road to a specified standard for eight years (ie years 3–10). The terms of the arrangement also require the operator to resurface the road at the end of year 8—the resurfacing activity is revenue-generating.

At the end of year 10, the arrangement will end. The operator estimates that the costs it will incur to fulfil its obligations will be:

Table 1.1 Contract costs Service Concession Read more

Leasehold makegood and restoration provisions

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Leasehold makegood and restoration provisions – Lease makegood / leasehold restoration provisions should be recognised in relation to properties held under operating leases. Such a provision may arise because many property leases contain clauses under which the lessee has to make good dilapidations or other damage which occurs to the property during the course of the lease or restore a property to a specified condition.

Overview Leasehold makegood and restoration provisions leased office

Under IAS 37 14, a provision shall be recognised when: Leasehold makegood and restoration provisions leased office

  • “An entity has a present obligation (legal or constructive) as a result of a past event;
  • It is probable that an outflow of resources embodying economic
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Components of a company’s pension liability

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Components of a company’s pension liability – A company’s defined-benefit pension plans have three basic components:

    • accrued-benefit obligations, or the future liabilities created by employees’ service;
    • plan assets, used to pay pension benefits; and
    • unamortized actuarial gains and losses.

Setting aside unamortized actuarial gains and losses, when plan assets are less than the accrued benefit obligation, a net pension liability is recorded on the statement of financial position. A net pension liability is the estimate of the amount needed to pay for pension benefits that have been earned by current and past employees, less the pool of assets set aside in a separate legal entity to eventually pay for the benefits.

A net pension asset arises when … Read more