Regulatory and ethical considerations

Accounting A2 · Financial accounting. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

International Accounting Standards (IAS) make the statements of different companies comparable and help them show a true and fair view. IAS 1 sets out what a full set of statements contains. IAS 7 groups cash flows under operating, investing and financing activities. The other standards say how particular items are measured and disclosed.

Accountants must also behave ethically. The five fundamental principles are integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.

Directors are stewards of the shareholders’ money and are responsible for preparing the statements. An external auditor is independent, is appointed by the shareholders and reports to them. An internal auditor is an employee who reports to management.

Rules to remember

IAS 2: inventory is valued at the lower of cost and net realisable value. FIFO and AVCO are allowed; LIFO is not.
IAS 8: a change of accounting policy is applied retrospectively; a change of estimate (for example useful life) is applied from now on; material errors of earlier years are corrected retrospectively.
IAS 10: an adjusting event gives evidence of a condition that existed at the year end, so the figures are changed. A non-adjusting event is disclosed in a note if it is material.
IAS 16 and IAS 36: an asset is impaired when its carrying amount is more than its recoverable amount. Recoverable amount = the higher of fair value less costs of disposal and value in use.
IAS 37: a provision is recognised when there is a present obligation, an outflow is probable and the amount can be estimated reliably. A contingent liability is only disclosed in a note.
IAS 38: inherent (internally generated) goodwill is not recognised as an asset. Only purchased goodwill is shown in the statement of financial position, as an intangible non-current asset.
An unqualified audit report says the statements give a true and fair view. A qualified report means the auditor has a reservation.

Common mistake

Students take the lower of the two values for recoverable amount. It is the higher of fair value less costs of disposal and value in use; the asset is then written down only if its carrying amount is above that figure.

Worked example

A machine has a carrying amount of $80 000. It could be sold for $64 000 with selling costs of $2000. Its value in use is $70 000. What impairment loss should be recognised?

Fair value less costs of disposal = $64 000 − $2000 = $62 000.
Recoverable amount is the higher of $62 000 and $70 000, so it is $70 000.
Impairment loss = carrying amount − recoverable amount = $80 000 − $70 000 = $10 000.

Answer: An impairment loss of $10 000 is charged to profit or loss and the machine is carried at $70 000.

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6. International Accounting Standards (IAS) (PDF)

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