Appunti International Accounting

Introduction

Introduction............................................................................................................................................ 2

Double entry logic

Double entry logic ................................................................................................................................... 4

Accounting harmonization

Accounting Harmonization ...................................................................................................................... 9

IFRS S1 - General requirements for disclosure of sustainability-related financial information

IFRS S1 - General Requirements for Disclosure of Sustainability-related Financial Information ................ 16

Financial statements IAS 1

Financial Statements IAS 1 .................................................................................................................... 21

Common-size analysis

Common-Size Analysis .......................................................................................................................... 40

Ratio analysis

Ratio Analysis ....................................................................................................................................... 42

Property, plant and equipment IAS 16

Property, Plant and Equipment IAS 16 ................................................................................................... 47

Impairment test – IAS 36 svalutazione

Impairment test – IAS 36 svalutazione ................................................................................................... 53

Intangible assets

Intangible Assets .................................................................................................................................. 55

Financial instruments IFRS 9

Financial Instruments IFRS 9 .................................................................................................................. 64

Groups and consolidated statement

Groups and consolidated statement ...................................................................................................... 68

Introduction

Accounting has some potentialities and limitations. Financial internal and external evaluations, time orientation, and subjective evaluation need to know how they’ve been generated. The type of organization is important; for example, in Italy, there’s an association that monitors the insurance sector, which can be helpful to analyze the market. Get a global view by putting together different sectors’ information.

Accounting is the process that identifies, measures, and communicates financial information about an entity to allow informed judgment and decisions to be taken by the information users. Last year, other types of numbers and information, other than the financial ones, were included.

• Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions, and events which are, in part at least, of a financial character, and interpreting the results thereof - Accounting Terminology Bulletin no 1, 1953
• Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information. - American Accounting Association, 1966
• Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that are intended to be useful in making economic decisions and in making resolved choices among alternative courses of action. - Accounting Principles Board, 1970

Users – stakeholders

Each user group has its specific information needs.

• Managers need information on performance and position
• Investors read the financial statement, typically looking for the future dividends
• Other lenders evaluate the economic stability and analyze vulnerability
• Employees need information about the working environment to make future decisions
• Suppliers evaluate the economic stability and analyze the vulnerability
• Customers look at the continuity of supply and availability
• Governments use national statistics, taxation, and regulations
• Public/Community/Society – Public interest impact on the local economy (positive) and environmental concerns (negative), there may be a trade-off between these two

Expanding general or specific purpose of accounting?

There is a view supporting that a general-purpose financial statement could be designed to be useful to more than one user group. This could be more informative and may be reconsidered in the future. Owners and long-term lenders are regarded as primary users, but all potential users are interested in the financial performance and financial position of the firm. The international accounting rules focus on investors, as they are seen as the first point of interest.

Alternative definitions

Accounting is the language of business: accounting provides information to managers and owners in order for them to make better business decisions. It is about recording, preparing, and interpreting business transactions, which are reflected in monetary terms.

The accounting system can be considered as a library: it stores firms’ financial data and is organized in a method. The manager uses the library to gather the necessary information, and the manager’s choices are reflected in the library.

Double entry logic

Double entry logic is based on a simple mathematical idea: A = L + E. Equity is the net richness of a company and approximates the value of the company. Assets are the gross richness of a company, resources available to the business. Liabilities are obligations of the business.

The balance sheet (or statement of financial position) is a document designed to show the state of affairs of an entity.

Causes of change in equity

• Normal business transactions: supplying goods and services to customers
• Owner contributing resources to the business (investing cash)
• Owner withdrawing resources from the business (cash withdrawal) dividends

Profit = Revenue – Expenses. Revenue is the increase in ownership interest (i.e., increase in net assets) by providing a product or service to a customer for which payment is made. Expense is the decrease in ownership interest (i.e., decrease in net assets) due to the cost of providing a service to a customer.

The income statement (profit and loss account) reports the revenues and expenses flows of a period.

Expenses

Another definition of Assets: the resources with remaining future benefits at the final period, resources not consumed in the present period. Expenses are the resources used up in the period.

Two methods are available for measuring them:

1. Expenses = resources used up in the period, so Assets = the rest of the resources
2. Assets = resources with remaining future benefits at the final period, so expenses = the rest of the resources

Method 1, giving the primacy definition of “expense,” was a traditional way of doing accounting. However, from the 70s, there have been moves towards Method 2.

Cash flow statement

Liquidity is measured by the cash and near-cash assets and the change in those assets. Sales are made on credit, customers pay later; purchases may be done on debit, paying suppliers later; cash is used to buy inventory (stock) which is sold later.

General rules of T accounts

An Account shows the effect of transactions of a given asset, liability, equity, revenue, or expense account. Double-entry accounting system (two-sided effect).

• Record made by debiting (left side) at least one account and crediting (right side) another.
• DEBITS must be equal to CREDITS.

By convention:

• Term debit indicates the left side “dare.”
• Term credit indicates the right side “avere.”

Typologies of T-account

• Assets: probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Examples include cash, account receivables, prepaid expenses, vehicles, buildings, goodwill, copyrights, patents. IASB definition: Asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
• Liabilities: probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. Examples include account payables, bank loans, lines of credit, personal loans, and unearned income. IASB definition: Liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
• Equity
• Revenues
• Expenses

Different way of working according to the side of the equation (and sign) A = L + E.

Accounting cycle: identify and record

What to record? An item should be recognized in the financial statements if its element is measurable and relevant in a faithful representation.

When to record?

Fiscal and calendar year. Accounting time periods are generally a month, a quarter, or a year. Monthly and quarterly periods are called interim periods. Most firms use the calendar year (January 1 to December 31) as their accounting period.

Example

The revenue recognition principle dictates that companies recognize revenue in the accounting period in which it is earned.

In a service enterprise, revenue is considered to be earned at the time the service is performed. To illustrate, assume that Dave's Dry Cleaning cleans clothing on June 30, but customers do not pay until the first week of July. Under the revenue recognition principle, Dave's earned revenue is in June when it performed the service, rather than in July when it received the cash. On June 30, Dave's would report a receivable on its balance sheet and revenue in its income statement for the service performed.

Matching principle

Accountants follow a simple rule in recognizing expenses: "Let the expenses follow the revenues." That is, expense recognition is tied to revenue recognition.

In the dry-cleaning example, this principle means that Dave's should report the salary expense incurred in performing the June 30 cleaning service in the income statement for the same period in which it recognizes the service revenue. The critical issue in expense recognition is when the expense makes its contribution to revenue. This may or may not be the same period in which the expense is paid. If Dave's does not pay the salary incurred on June 30 until July, it will report salaries payable on its June 30 balance sheet.

This practice of expense recognition is referred to as the matching principle. It dictates that efforts (expenses) be matched with accomplishments (revenues).

Accounting cycle: journalizing and posting

General Journal: a chronological record of transactions.

September 1: Shareholders invested $15,000 cash in the corporation in exchange for ordinary shares.

Posting: transferring amounts from the journal to the ledger accounts, that contain all the T accounts.

Example

1) Shareholders invest $100,000 cash in an advertising venture to be known as Pioneer Advertising Agency Inc. Balance sheet: equity $100,000, assets $100,000.

2) Pioneer Advertising purchases office equipment costing $50,000 by signing a 3-month, 12%, $50,000 note payable. Balance sheet: left side $150,000, right side $150,000 (100,000 eq, 50,000 liab.). NB: note payable is the used word to indicate there are interests to pay.

3) Pioneer Advertising receives a $12,000 cash advance from KC, a client, for advertising services that are expected to be completed by December 31. Balance sheet: left side $162,000, right side $100,000 eq, $62,000 liab.

4) Pioneer Advertising pays $9,000 office rent, in cash, for October. Balance sheet: left side $153,000, right side $91,000 eq, $62,000 liab. Income statement: $9,000 loss that “goes” in the equity.

5) Pioneer Advertising pays $6,000 for a one-year insurance policy that will expire next year on September 30. Balance sheet: left side $153,000, right side $91,000 eq, $62,000 liab. Income statement: $9,000. NB: In the UK system we do not have “ratei” and “risconti” but we use the account “prepayment.”

6) Pioneer Advertising purchases, for $25,000 on account, an estimated 3-month supply of advertising materials from Aero Supply. Balance sheet: left side $178,000, right side $91,000 eq, $87,000 liab. Income statement: $9,000.

7) Pioneer Advertising signs a contract with a local newspaper for advertising inserts (flyers) to be distributed starting the last Sunday in November. Pioneer will start work on the content of the flyers in November. Payment of $7,000 is due following delivery of the Sunday papers containing the flyers. There’s no transaction.

8) Pioneer Advertising’s board of directors declares and pays a $5,000 cash dividend to shareholders. Balance sheet: left side $173,000, right side $86,000 eq, $87,000 liab. Income statement: $9,000.

9) Employees are paid every four weeks. The total payroll is $2,000 per day. The pay period ended on Friday, October 26, with salaries of $40,000 being paid.

Accounting harmonization

Possible differences in the Accounting Standards adopted when drafting financial statements by firms in different Countries, determine insufficient comparability and great difficulty for the economic operators to invest based on so different information. The lack of comparability prevents stakeholders interested in the performance of the firm, making it harder to analyze, compare, and elaborate, without a previous deep knowledge of the accounting standards adopted for producing the final financial reports, of a foreign enterprise. This aspect produces a check to the international investments and, on the other hand, difficulty in raising capital across national borders, for the European companies.

The core objective of the Essay EEC in 1957 was the creation of an internal market characterized by the abolition between Member States, of obstacles to the free movement of goods, people, services, and capital. So, for the EU (legal point of view), one of the goals to pursue to favor the internalization process of the community firms was the uniformity of the financial reporting.

Origin of differences in accounting practices

Possible causes to explain the differences in national accounting practices reveal several influencing factors: providers of finance, legal system, cultural differences, and taxation. The most used taxonomy is by Nobes’ classification (1980), which was there before the enactments in EU countries of the Fourth Directive on company law and before the emergence of IAS/IFRS. Factors that have been seen as affecting accounting development:

• Colonial and other outside influences
• Prevalent providers of finance
• Nature of the legal system
• Influence of taxation
• Strength of the accounting profession

Harmonization in EU

A process of increasing the compatibility of accounting practices by setting limits to their degree of variation. The financial statement discipline tends to international harmonization, or rather to only the whole single accounting framework to be applied uniformly for all Countries that join the convergence process. Harmonization equals standardization, producing new standards inspired by the different traditions (especially UK’s and US). Convergence: even though the EU countries wanted to adopt, the US wanted to maintain their accounting principles. Now we have IFRS and US GAAP (Generally Accepted Accounting Principles). It is the gradual alignment of IFRS and US GAAP, followed by other jurisdictions aligning with the result of that convergence. Goal: improvement of the quality of financial statements, assuring an efficient operation of the economic systems.

Characteristics of the information of the financial statement

• Relevance main characteristic
• True and fair view
• Understandability
• Comparability
• Reliability

The first concrete step toward accounting harmonization at the community level was completed in ’78 with IV Council Directive (78/660/EEC) on the annual accounts of companies with limited liability; and in ‘83, with VII Council Directive (83/349/EEC) on consolidated accounts. In Italy, they were incorporated through the Legislative Decree No. 127/91 (then incorporated within the Civil Code). Directives were not the best way to achieve harmonization because of the many options that were granted to States members.

European Union measures

The European Union decided to solve the problem of harmonization of international accounting standards with the (direct) adoption of the standards, through the following law measures:

• Regulation (EC) no. 1606/2002 (IAS Regulation) IAS regulations became law for all big organizations
• Directive 2001/65/EC (recognized in Italy by Legislative Decree 394/03) and Directive 2003/51/EC (recognized in Italy by Legislative Decree 32/07) for all the organizations

The European Union introduced the International Accounting Standards with Regulation 1606/2002 for Consolidated Financial Statements of listed companies.

IASB (International Standard Board)

It is an independent standard setter and has total autonomy in the determination of international standards.

Objectives:

• Develop for the public interest, a single set of high quality, understandable, and enforceable global accounting standards that deliver transparent and comparable information in financial statements and other financial reporting, helping stakeholders make informed decisions