SBR WRITING PRACTICES
FINANCIAL REPORTING FRAMEWORK
QUESTION 1 : DENVER CO
Discuss on 23/10/23
(a) Help Annie to explain how financial statements can achieve a fair presentation by referring
to IAS 1 Presentation of Financial Statements, including the principles of departure from
IFRS requirements.
Answer :
According to the IAS 1 Presentation of Financial Statements, fair presentation is achieved if
IFRS Accounting Standards are appropriately applied and additional disclosure is given
when it is necessary.
Bukan comply dgn IAS 1 sahaja, kena comply all the IFRS..
The principle of departure from IFRS requirements is that the management may come to
the conclusion that complying with IFRS requirements would be so misleading that it would
conflict with the objective of the financial statements set out in the framework.
Recap obj. FS:
Provide financial info about the ALE, Inc, Exp that is useful to the users in assessing the
prospects of the future cash inflows and in assessing the mgt. stewardship.
If the local laws and regulations permit, the entity can depart from IFRS requirements as
long as the specific disclosures is provided. This is commonly known as true and fair
override.
kw: permit/ prohibit
If the local law and regulations prohibit departure from IFRS requirements, then the entity
should make disclosures which will reduce the perceived misleading and adjustments
showing that they believe is necessary to fairly present the information
(b) The two new staff have some doubts about applying materiality which requires them to
make judgment in preparing the financial statements. Discuss the principle of materiality
(dalam IAS 1) and the greater application of materiality judgment in accordance with the
IFRS Practice Statement 2: Making Materiality Judgements
Kalau dia cakap Discuss, banyak bnda boleh kita bagi.
Eg: definition, problem
Bagi definition materiality:
According the IAS 1 Presentation of the Financial Statements, materiality is defined as
information that if omitting, misstating or obscuring it could reasonably be expected to influence
the decisions that the primary users of general purpose financial reports make on the basis of
those report, which provide financial information about a specific reporting entity.
IAS 1 also specifies that:
(1) each material class of similar items should be presented separately. Dissimilar items should
be presented separately unless they are immaterial.
(2) Disclosures required by the IFRS are not required to be given if the information that results
from that disclosure is not material.
(3) Entity should consider whether additional disclosures should be provided if compliance with
the IFRS requirements is insufficient for users understanding.
The application of material therefore requires judgements. Inappropriate application of material
will contribute to disclosure problem. The disclosure problems are:
-not enough relevant information,
-too much irrelevant information and
-ineffective communication of information.
The disclosure problems are address through the IFRS Practice Statement 2: Making Materiality
Judgements. Since the two new staff have some doubt about applying materiality, this practice
statement will address this issue by encouraging greater application of judgement in the
preparation of financial statements
The general characteristics of materiality are recognition and measurement, and presentation
and disclosure. The recognition and measurement criteria only need to be applied when the
effect of applying them is material.
The disclosure criteria: if the information provided by a certain disclosure requirement is not
material, the entity does not need to make that disclosure, even if that disclosure is a part of a
list of minimum required disclosures by IFRS. However, the entity should also consider whether it
also needs to disclose information not specifically required by IFRS if that information is needed
to understand the financial statements.
One way of making materiality judgement when preparing the financial statements is to apply
the four-step process. They are identify, assess, organise and review the information.
Firstly, identify the information that is potentially material. The two new staff should consider
the requirements of the IFRS standards and the common information needs of primary users.
Secondly, Assess whether the information is material. Whether the information could reasonably
expected to influence the primary users and consider the qualitative and quantitative factors. It
is more efficient to assess the quantitative factor first (consider the size of the effect of
transaction against measure of the entity’s financial statements as well as any unrecognized
items that could affect primary users perceptions) whether or not the item has exceeds the
decided threshold, such as 5% profit. Then, assess the qualitative factors (internal and external) if
the item does not exceed the quantitative threshold. If the items does exceed the quantitative
threshold, it is material and no further assessment required.
Kw: Qt and Ql, then impact on primary users
Thirdly, organise the information into draft financial statements. Apply judgement to determine
best way to communicate clearly and concisely.
Fourthly, review the complete set of draft financial statements. On the basis of the complete set
of the financial statements, consider whether all material information has been identified.
QUESTION 2: DEC 2018
(a) Explain how the probability criterion has not been applied consistently across accounting
standards.(IFRS std la maksudnya) Illustrate your answer with reference to how there may
be inconsistencies with the measurement of assets held for sale, provisions and contingent
consideration. Your answer should also discuss how the Board’s proposed changes to the
recognition criteria address the issue.
CF kata lain, Std kata lain.
Under Chapter 5 CF : Recognition and Derecognition
According to the previous Conceptual Framework, element of financial statements are to be
recognised if:
a) The inflow or outflow of the economic benefits was probable and
b) The item could be measured with reliability
However, these criteria were not applied consistently with IFRS Standards. This is because
different standards use different levels of probability in determining when elements should
be recognised.
For example, the economic benefits of the property, plant and equipment and intangible
assets need to be probable in order to be recognised. The non-current assets held for sale
the sale has to be highly probable to be recognised as current asset
Under IAS 37 Provisions, Contingent Assets and Contingent Liabilities, a provision should be
probable to be recognised while the uncertain assets should be virtually certain to be
recognised.
This could lead to a situation where two sides of court case have two different accounting
treatments despite the likelihood of payout being identical for both parties.
Contingent consideration is recognised in the financial statements regardless of the level of
probability (dlm consol FS) . Only the fair value will be adjusted to reflect the level of
uncertainty of the contingent consideration.
The Board proposed changes to the recognition criteria which requires decisions to be made
with reference to the qualitative characteristics of financial information. An entity should
now recognise an asset or liability if such recognition provides users of the financial
statements with: (these are revised 2018 CF, more general recognition criteria)
-more relevant information and faithful representation of the asset or liability
-information which results in benefits exceeding the costs of the information (subject to cost
costraints)
The key change here is to remove the probability criterion. This means that more assets and
liabilities with a low probability of inflow or outflow of economic resources are likely to be
recognised.
The Board accepts that prudence could still mean there will be inconsistencies in the
recognition of assets and liabilities within the financial standards but may be necessary
consequence of providing the most useful (relevant) information.
Prudence: in events of uncertainty, we exercise cautions, *(kita taknak overstate asset/profit
or understate liabilities)*
Soalan ni tak faham sangat..
(b) (i) Discuss briefly the arguments for and against issuing the IFRS Practice Statement
Management Commentary (dlm WB: Ch18) as a non-binding framework (not compulsory)
or as an IFRS Standard (IFRS compulsory).
Soalan dia tanya mcm MC tu patut jadi compulsory or not???
Management commentary: A narrative report that relates to financial statements that have
been prepared in accordance with IFRSs.
The IFRS Practice Statement Management Commentary provides a broad, non-binding
framework for the presentation of the management commentary that relates to the financial
statements that have been prepared in accordance with the IFRS Standards.
The Practice Statement is not an IFRS Standard. In other words, entities applying IFRS
Standards are not bind to follow the Practice Statement, unless specifically required by their
jurisdiction (local law and regulations). Furthermore, non-compliance with the Practice
Statement will not prevent an entity’s financial statements from complying with IFRS
Standards.
A standard is to ensure consistency of application of the principles and practices of the
management commentary (MC).
However, it is difficult to create a standard on the MC which is sufficiently detailed to cover
the business models of every entity or to be consistent with all IFRS Standards. Some
jurisdictions take little notice of non-mandatory (not compulsory) guidance but the Practice
Statement provides regulators with a framework to develop more authoritative
requirements. (advantage of having PS)
The Practice Statement allows companies to adapt the information provided to particular
aspects of their business. The flexible approach could help generate more meaningful
disclosures about resource, risks and relationships which can affect an entity’s value and how
these resources are managed (on management POV) . It provides management with an
opportunity to add context to the publishes financial information, and to explain their future
strategy and objectives without being restricted by the standard.
If the MC were a full IFRS Standards, the integration of management commentaries and the
information produced in accordance with IFRS Standards could be challenged on technical
grounds as well as its practical merits.
In addition, there could be jurisdictional concerns that any form of integration might not be
accepted by local regulators.
Kalau kita buat MC ni compulsory, nnti dia jadi more standardise, comparable tapi
Extra info :
[Link]
statement/
(ii) Discuss how the qualitative characteristics of understandability, relevance and
comparability should be applied to the preparation of the management commentary.
According to the framework, it is important for the information provided in the
financial statements to be understandable by the users. The MC should be presented clearly
and concisely, in simple language and a style appropriate to the users’ needs.
The primary users of the MC are potential and existing investors, lenders and other creditors.
The form and content of the MC will vary between entities, depending on the nature of their
business, strategies and the industry sector which they operate.
Users should be able to locate information relevant to their needs. Information is
relevant when it has the capacity to influence the economic decisions of the users by helping
them evaluate the past, present or future events or confirming or correcting their past
evaluations.
Relevant financial information is capable of making difference to the decision made by users.
In order to make a difference, the financial information need to has predictive value,
confirmatory value or both.
It is up to (the responsibility of) the management to determine what information is
important enough to be included in the MC to enable users to understand the financial
statements and meet the objective of the MC.
If the entity provides too much information, this will reduce the relevance and the
understandability. If material events or uncertainties are not disclosed, then users may have
insufficient information to meet their needs. However, unnecessary detail may obscure
important information especially if entities adopt a boiler-plate approach.
If management present too much information about, for example, all the risks facing an
organisation, this will conflict with the relevance objective. There is no optimal numbers of
the disclosures but it is useful to only present important information to the users.
Comparability is the qualitative characteristics which enable users to compare and
identify similarities or differences between the items. It is important for the users to be able
to compare information over time and between entities. Comparing the MC is not
appropriate since the MC is deigned to reflect the perspectives of management and he
circumstance of individual entities. Therefore, entities in the same industry may have
different perceptions of what is important and how they measure and report it.
There are some precedents on how to define and calculate non-financial measures
and financial measures which are not produced in accordance with IFRS standards but there
are inconsistencies in the definition and calculation of these measures. It is sometimes
suggested that the effectiveness of the overall report may be enhanced by strengthening the
links between financial statements and the MC.
However, such suggestions raise concern about maintaining a clear distinction between the
financial statement information and other information. An entity should ensure consistency
in terms of wording, definitions, segments disclosures etc between the financial statements
and the MC to improve the understandings of financial performance.
QUESTION 3: SBR SPECIMEN EXAM 1
Africant is about to hold its annual general meeting with shareholders and the directors wish
to prepare for any potential questions which may be raised at the meeting. There have been
discussions in the media over the fact that the most relevant measurement method should
be selected for each category of assets and liabilities. This ‘mix measurement approach’ is
used by many entities when preparing financial statements. There have also been comments
in the media about the impact that measurement uncertainty and price volatility can have
on the quality of financial information
Discuss the impact the above matters may have on the analysis of financial statements by
investors in Africant.
Professional marks will be awarded for clarity and quality of presentation.
Clarity: clear explanation
Quality: points of argument w examples
Some investors might argue against the mixed measurement approach because the
mixed measurement approach is opposed to a single measurement basis in which all items
are measured using the same basis, eg all items are measured at fair value. They see that the
effect of using the mixed measurement methods will cause the totals and subtotals of the
recognised assets and liabilities under the single measurement basis to have little meaning.
Similarly, profit or loss may lack relevance if it reflects a combination of flows based on
historical cost and of value changes for items measured on a current value basis.
However, the majority of the investors would favour a mixed measurement approach,
whereby the most relevant measurement method is selected for each category of assets and
liabilities. This approach is consistent with how investors analyse financial statements. The
mixed measurement approach provides the most useful (relevant) information to the
primary users of the financial statements.
The mixed measurement approach for example is IFRS 9 Financial Instruments and IFRS 15
Revenue from Contract with Customers. Historical cost would not have been relevant for all
financial assets and has severe limitations for many liabilities, hence the only viable single
measurement method would have been fair value.
IFRS 9 requires the use of cost in some cases and fair value in other cases while IFRS 15
essentially applies cost allocation. The draft Conceptual Framework does not propose a
single measurement method for all assets and liabilities and instead supports the continued
use of a mixed measurement approach.
Most accounting measures of assets and liabilities are uncertain and require estimation.
While some measures of historical cost are straightforward as it is the amount paid or
received, there are many occasions when the measurement of cost cane uncertain
particularly recoverable cost, for which impairment and depreciation estimates are required.
In a similar vein, while some measures of fair value can be easily observed because of the
availability of prices in an actively traded market (a so-called Level 1 Fair Value). Others
inevitably rely on management estimates and judgements (Level 2 and Level 3).
High measurement uncertainty might reduce the quality of the information available to the
investors. High price volatility may make analysing an investment in that entity more
challenging. If a relevant measure of an asset or liability value is volatile, this should not be
hidden from investors. To conceal its volatility would decrease the usefulness of the financial
statements. Of course, such volatile gains and losses do need to be clearly presented and
disclosed, because their predictive value may differ from that provided by other components
of performance.
