FRA

STUDY MATERIAL M.COM 1ST SEMESTER 

FINANCIAL REPORTING ANALYSIS 

1. Objectives and responsibilities of IASCF.(10 marks) 2014  (5 marks) 2015, 2016, 2018 

The objectives of the IASC Foundation are: 

(a) To develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world's capital markets and other users make economic decisions; 

(b) To promote the use and rigorous application of those standards; 

(c) In fulfilling the objectives associated with (a) and (b), to take account of, as appropriate, the special needs of small and medium sized entities and emerging economies; and 

(d) To bring about convergence of national accounting standards and International Accounting Standards and International Financial Reporting Standards to high quality solutions. 

Responsibilities of IASC Foundation are as follows: 

(a) Assume responsibility for establishing and maintaining appropriate financing arrangements; 

(b) Establish or amend operating procedures, for the Trustees; 

(c) determine the legal entity under which the IASC Foundation shall operate, provided always that such legal entity shall be a Foundation or other body corporate conferring limited liability on its members and that the legal documents establishing such legal entity shall incorporate provisions to achieve the same requirements as the provisions contained in this Constitution; 

(d) Review in due course the location of the IASC Foundation, both as regards its legal base and its operating location; 

(e) Investigate the possibility of seeking charitable or similar status for the IASC Foundation in those countries where such status would assist fund raising; 

(f) Open their meetings to the public but may, at their discretion, hold certain discussions (normally only about selection, appointment and other personnel issues, and funding) in private; and 

(g)Publish an annual report on the IASC Foundation's activities, including audited financial statements and priorities for the coming year. 

In addition to the above duties, the Trustees shall also: 

(a) Appoint the members of the IASB and establish their contracts of service and performance criteria: 

(b) Appoint the members of the International Financial Reporting Interpretations Committee and the Standards Advisory Council; 

(c) Review annually the strategy of the IASC Foundation and the IASB and its effectiveness, including consideration, but not determination. of the IASB's agenda; 

(d) Approve annually the budget of the IASC Foundation and determine the basis for funding; 

(e) review broad strategic issues affecting accounting standards, promote the IASC Foundation and its work and promote the objective of rigorous application of International Accounting Standards and International Financial Reporting Standards, provided that the Trustees shall be excluded from involvement in technical matters relating to accounting standards; 

(f) Establish and amend operating procedures, consultative arrangements and due process for the IASB, the International Financial Reporting Interpretations Committee and the. Standards Advisory Council; 

(g) Review compliance with the operating procedures, consultative arrangements and due process as described in (f);

(h) Approve amendments to this Constitution after following a due process, including consultation with the Standards Advisory Council and publication of an Exposure Draft for public comment and subject to the voting requirements given in Section 14; 

(i) exercise all powers of the IASC Foundation except for those expressly reserved to the IASR, the International Financial Reporting Interpretations Committee and the Standards Advisory Council; and 

(j) Foster and review the development of educational programs and materials that are consistent with the IASC Foundation's objectives. 

2. Role of International Financial Reporting Interpretation Committee. 5 marks (2016, 2019) 

The Interpretations Committee, formerly called the International Financial Reporting Interpretation Committee, is comprised of fourteen voting members, appointed by the Trustees for renewable terms of three years. The Trustees select members of the Interpretation Committee so that it comprises a group of people representing, within that group, the best available combination of technical expertise and diversity of international business and market experience in the practical application of IFRS and analysis of financial statements prepared in accordance with IFRSs. 

The Trustees shall appoint the chairperson of the Interpretations Committee. The Chair has the right to speak on the technical issues being considered but not to vote. The Trustees, as they deem necessary, shall appoint as non-voting observers representatives of regulatory organizations, who shall have the right to attend and speak at meetings. The Interpretations Committee shall meet as and when required. 

The Interpretations Committee shall: 

a) Interpret the application of IFRSs and provide timely guidance on financial reporting issues not specifically addressed in IFRSs, in the context of the IASB's Framework, and undertake other tasks at the request of the IASB; 

b) In carrying out its work under (a) above, have regard to the ISAB's objective of working actively with national standard-setter to bring about convergence of national accounting standards and IFRSs to high quality solutions; 

c) Publish after clearance by the IASB draft Interpretations for public comment and consider comments made within a reasonable period before finalizing an Interpretation; and 

d) Report to the IASB and obtain the approval of nine of its members for final Interpretations if there are fewer than sixteen members or by ten of its members if there are sixteen members. 

3. Important objectives of issuing IFRS. 5 marks (2017, 2018) 

The International Accounting Standards Board (the Board) was established in 2001 and is the independent standard-setting body of the IFRS Foundation, an independent, private sector, not-for-profit organization working in the public interest. Its principal objectives are: 

i) To develop, in the public interest, a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRS Standards) based upon clearly articulated principles. These standards should require high quality, transparent and comparable information in financial statements and other financial reporting to help investors, other participants in the world's capital markets and other users of financial information make economic decisions; 

ii) To promote the use and rigorous application of those standards; 

iii) In fulfilling the objectives associated with (1) and (2). to take account of, as appropriate, the needs of a range of sizes and types of entities in diverse economic settings; and 

iv) To promote and facilitate adoption of IFRS Standards, being the standards and interpretations issued by the Board, through the convergence of national accounting standards and IFRS Standards. 

4. Scope of issuing IFRS. 5 marks (2015, 2018) 

The scope of IFRS is enumerated below: 

i) IFRSs apply to the general purpose financial statements and other financial reporting by profit-oriented entities — those engaged in commercial, industrial, financial, and similar activities, regardless of their legal form. 

ii) Entities other than profit-oriented business entities may also find IFRSs appropriate. 

iii) General purpose financial statements are intended to meet the common needs of shareholders, creditors, employees, and the public at large for information about an entity's financial position, performance, and cash flows. 

iv) Other financial reporting includes information provided outside financial statements that assists in the interpretation of a complete set of financial statements or improves users' ability to make efficient economic decisions. 

v) IFRS apply to individual company and consolidated financial statements. 

vi) A complete set of financial statements includes a statement of financial position, a statement of comprehensive income, a statement of cash flows, a statement of changes in equity, a summary of accounting policies, and explanatory notes. When a separate income statement is presented in accordance with IAS 1(2007), it is part of that complete set. 

vii) In developing Standards, IASB intends not to permit choices in accounting treatment. Further, IASB intends to reconsider the choices in existing IASs with a view to reducing the number of those choices. 

5. Process of issuing International Financial Reporting Standard 8 marks (2017) 

International Financial Reporting Standards, are the accounting standards issued by the International Accounting Standards Board which now operates under IFRS Foundation. IFRS are developed through an international consultation process the "due process" which involves interested individuals and organizations from around the world. The "due process" comprises of six stages, with the Trustees having the opportunity to ensure compliance at various points throughout. These stages are: 

1) Setting the Agenda: 

The IASB first set an agenda on an important issue for consideration and evaluates the merits of adding a potential item to its agenda by reference to the needs of investors. 

The following issues are considered while setting the agenda: 

a) Relevance and reliability of information that could be provided 

b) Whether existing guidance available 

c) The possibility of increasing convergence 

d) The quality of the standard to be developed 

e) Resource constraints 

To help the IASB in considering its future agenda, their staff is asked to identify, review and raise issues that might warrant the IASB's attention. New issues may also arise from a change in the IASB's conceptual framework. In addition, the IASB raises and discusses potential agenda items in the light of comments from other standard-setters and other interested parties, the IFRS Advisory Council, the IFRS Interpretations Committee, etc. The IASB receives requests from constituents to interpret, review or amend existing publications. The staff considers all such requests, summarize major or common issues raised and present them to the IASB from time to time. A simple majority vote at an IASB meeting is sufficient for getting the approval to the agenda items. 

2) Project Planning:

  After setting the agenda, the IASB decides whether to conduct the project alone or jointly with another standard-setter. Similar due process is followed under both approaches. After considering the nature of the issues and the level of interest among constituents, the IASB may establish a working group at this stage. 

3) Developing and Publishing the Discussion Paper: 

After this the IASB prepare a discussion paper on the item selected for development of the standard. The task of preparing the discussion paper is generally entrusted to the working group. 

4) Development and publication of an Exposure Draft: 

Publication of an exposure draft is a mandatory step in due process.  The development of an exposure draft begins after the IASB resolves the following issues: 

a) Issues on the basis of staff research and recommendations; 

b) Comments received on any discussion paper; and 

c) Suggestions made by the IFRS Advisory Council, working groups and accounting standard-setters and suggestions arising from public education sessions. 

After resolving issues at its meetings, the IASB instructs the staff to draft the exposure draft. After the completion of the draft, it is placed for IASB consent. Only thereafter the IASB publishes it for public comments. 

5) Development and publication of an IFRS: 

The development of an IFRS is carried out during IASB meetings, when the IASB considers the comments received on the exposure draft. After resolving the issues arising from the exposure draft, the IASB considers whether it should expose its revised proposals for public comment by publishing a second exposure draft. Finally, after the due process is completed, all outstanding issues are resolved and the IASB members have balloted in favour of publication, the IFRS is issued. 

6) Procedure after an IFRS is issued: 

After an IFRS is issued, the staff and IASB members hold regular meetings with interested parties,including other standard-setter bodies, to help understand unanticipated issues related to the practical implementation and potential impact of its proposals. The IFRS Foundation also fosters educational activities to ensure consistency in the application of IFRS. 

6. Brief note on the measurement of elements of financial statements as outlined in the conceptual framework issued by the 'CAI. 

There are four measurement attributes for elements of traditional financial statements: historical cost, fair value, replacement cost, and settlement amount. 

Historical Cost: Historical cost is the price paid to acquire an asset or the amount received pursuant to the incurrence of a liability in an actual exchange transaction. Historical cost is an entry price and can only be used when measuring initial amounts. Use of historical cost, particularly with assets used in providing services, generally results in a cost-of-services amount that is relevant for assessing interperiod equity. However, use of historical cost presents challenges when presenting information about assets and liabilities that is comparable and useful for assessing financial position. Assets and liabilities presented at historical cost reflect the prices at the dates of transactions, rather than at the date of the financial statements. Consequently, amounts presented may reflect prices at multiple dates and may impede the ability to 

(a) compare this information with that of other entities, 

(b) understand the service potential embodied in assets, and 

(c) assess the amount of resources that will be required to satisfy liabilities. Historical cost does not adversely affect the timeliness of financial reporting. 

At times, however, complications such as application of different cost accounting methodologies, allocation of costs in a single transaction to the multiple items acquired, or reductions in original cost reported to represent the estimated usage of an asset over time, can reduce the understandability and reliability of the reported measure. 

Fair Value: Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is an exit price. For non-financial assets, the price should represent the value of the asset at its highest and best use as determined by market participants. The highest and best use notion takes into account uses that are physically possible, legally permissible, and financially feasible. For liabilities, the price should take into consideration the credit standing of the entity. Multiple valuation techniques may be used to measure fair value. Fair value is suitable for use either as an initial amount or as a remeasurement amount. Fair value could be applied as an initial amount in circumstances in which a historical cost amount is not available, typically because the asset or liability did not arise from an exchange transaction or because the asset or liability was acquired in a group without amounts assigned to the individual assets and liabilities in the group. Relevance of the use of fair value to presenting information that promotes the objectives of financial reporting is tied to (a) whether it is applied as an initial amount or a remeasured amount and (b) the nature of the asset or liability being measured. The extent to which a fair value is understandable, reliable, and timely depends upon the techniques and inputs used to measure fair value. Comparability of information in a statement of financial position is improved when fair value is used as a remeasured amount. Fair value generally is not suitable for assets that will be used directly to provide services because fair value is an exit price and governments will not be selling or otherwise exiting from these assets. 

Replacement Cost: Replacement cost is the price that would be paid to acquire an asset with equivalent service potential in an orderly market transaction at the measurement date. Replacement cost generally is considered to be suitable only for assets that will be used in providing services, rather than assets that will be converted to cash. Replacement cost is an amount that reflects an entry value. Because this measurement attribute reflects the entity-specific service potential of an asset, it may or may not reflect (a) the highest and best use of the asset from the perspective of market participants or (b) an identical asset. A measurement at the initial transaction date using the replacement cost measurement attribute is referred to as acquisition value. Acquisition value may be used in circumstances in which historical cost is not available, typically because the asset did not arise from an exchange transaction or because the asset was acquired as part of a group of items without values assigned to the individual items in the group. Consistent with the considerations regarding the use of initial and remeasured amounts, the use of replacement cost in conjunction with the application of the remeasured approach generally results in a cost-of-services amount that is less relevant for assessing interperiod equity than the use of either acquisition value or historical cost. Use of replacement cost in conjunction with the application of the remeasured approach. however, provides information about assets that is more comparable and useful for assessing financial position. The cost of determining replacement cost, along with the effect on understandability, reliability, and timeliness of financial reporting, varies depending upon the specific method of determining the amount. 

Settlement Amount: Settlement amount is the amount at which an asset could be realized or a liability could be liquidated with the counterparty, other than in an active market. A settlement amount can be either (a) the amount that the counterparty would accept to settle the liability or would pay to satisfy a receivable at the date of the measurement or (b) the amount that will be realized from an asset or will be needed to liquidate the liability in due course according to the terms of the arrangement between the government and the counterparty. A settlement amount may be an undiscounted amount (which generally is the case for assets and liabilities with short durations) or a discounted amount (which generally is the case for assets and liabilities with long durations). In circumstances in which the acquisition of an asset or incurrence of a liability is related to activities that occur in multiple reporting periods, a settlement amount also may be a proportion of the amounts expected to be received or paid. Settlement amount generally is not appropriate for assets and liabilities (a) for which there is no counterparty or (b) that are likely to be realized or settled through a transaction in a market. A measurement of a liability at the initial transaction date using the settlement amount measurement attribute is sometimes referred to as acquisition value. Settlement amount can be used in either an initial measurement approach or a remeasured approach. When used as a remeasured amount, settlement amount provides more relevant information for use in assessing an entity's financial position and information that is more comparable with information of other entities. The cost of determining settlement amount, along with the effect on understandability, reliability, and timeliness of financial reporting, varies depending upon the nature of the asset or liability being measured and the relative certainty or uncertainty of projected cash flows and other inputs to the measurement. 

7. Definition of Financial Statement as per Section 2(40) of the Companies Act, 2013 (2019) 

As per Sec 2(40) financial statement" in relation to a company, includes—

(1) A balance sheet as at the end of the financial year; 

(ii) A profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year; 

(iii) cash flow statement for the financial year; 

(iv) A statement of changes in equity, if applicable; and 

(v) Any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv): 

Provided that the financial statement. with respect to one person company. small company, dormant company and private company (if such private company is a start-up)may not include the cash flow statement; 

8. Procedure of measurement of the assets and liabilities reported in financial statements of a company. 

Assets and Their Measurement Bases 

Current Assets: 

Cash and cash equivalents: 

These include demand deposits with banks and highly liquid investments with original maturities of less than or equal to three months. Measuring cash and cash equivalents at amortized cost or fair value is not likely to produce materially different amounts. 

Marketable securities: 

These include investments in debt or equity securities that are traded in a public market, and whose value can be determined from prices that are obtained in a public market. Further details on these financial assets tend to be provided in notes to the financial statements. 

Trade receivables or accounts receivable: 

These refer to amounts that are owed to an entity by its customers for products and services that have already been delivered. They are usually reported at net realizable value, which is an approximation of fair value that is based on estimates of collectability. An allowance for doubtful accounts is made to reflect an entity's estimate of amounts that will ultimately be uncollectible. Additions to this allowance in a particular period are reflected as bad debt expenses; the balance of the allowance for doubtful accounts reduces the gross receivables amount to a net amount which is an estimate of fair value. 

Inventories: 

These are physical products which a company intends to sell to its customers, either in the form of finished goods or as inputs into a manufacturing process i.e. raw materials and work-in-process. Under IFRS, inventories are measured at the lower of cost and net realizable value, while under US GAAP; they are measured at the lower of cost or market value. Cost includes all associated costs of purchase, costs of conversion, and all other costs that are incurred in bringing the inventories to their present location and condition. Net realizable value (NRV) refers to the estimated selling price less the estimated costs of completion and costs necessary to make the sale. Market value is the current replacement cost, which cannot exceed the NRV and cannot be lower than the NRV less a normal profit margin. If the NRV or market value of inventory falls below its carrying amount, the company must write down the value of the inventory and reflect the loss in value in the profit and loss statement. 

Non-current Assets: 

Property, plant, and equipment (PPE): These are tangible assets, including land, buildings, and machinery, that are used in an entity's operations and expected to provide economic benefits over more than one financial year. Under IFRS, PPE may be reported using either the cost model or the revaluation model. Under US GAAP, however, only the cost model may be used. When the cost model is used; PPE is carried at amortized cost, i.e., its historical cost less accumulated depreciation or depletion, and less impairment losses. When the revaluation model is used, the reported and carrying value of PPE is the fair value at the date of revaluation less any subsequent accumulated depreciation. 

Investment property: 

This is property used solely to earn rental income, capital appreciation or both. Under IFRS, investment property may be reported using either the cost model or the fair value model. When the cost model is used; investment property is carried at amortized cost i.e. its historical cost less accumulated depreciation and less any impairment losses. When the fair value model is used, investment property is reported at its fair value. Gains or losses arising from a change in the fair value of investment property are recognized on the income statement in the period in which it arises. 

Intangible assets: 

These include patents, licenses, and trademarks, or any other asset which is non-monetary, has no physical substance but is able to be identified. Similar to PPE's, US GAAP permits intangible assets to be measured using only the cost model, while under IFRS; they may be reported using either the cost model or the revaluation model (when an active market is present). In the case of internally created identifiable intangibles, IFRS and US GAAP require that they are expensed rather than reported on the balance sheet. IFRS also requires that an entity separately identifies its research phase and its development phase; costs incurred internally generate intangible assets during the research phase and must be expensed on the income statement, while costs incurred during the development stage can be capitalized as intangible assets if certain criteria are satisfied. US GAAP, on the other hand, does not permit the capitalization as an asset of most costs of internally generated intangibles; all such costs are usually expensed. The costs that are typically expensed under both IFRS and US GAAP include start-up costs, training costs, administrative and other general overhead costs. 

Goodwill: 

This refers to the excess value created when the purchase price of a company exceeds the acquirer's interest in the fair value of the identifiable assets and liabilities that were acquired. There are two types of goodwill: economic goodwill and accounting goodwill. Economic goodwill is related to the economic performance of an entity and is theoretically reflected in the entity's stock price, while accounting goodwill is related to the accounting standards and is reported only when an acquisition is Notes payable: These are financial liabilities that are owed by an entity to its creditors through a formal loan agreement. 

Accrued expenses: 

These are expenses that have been recognized on an entity's profit and loss statement but which have not yet been paid as of the reporting date. 

Deferred income: 

This occurs whenever an entity receives payment prior to delivering goods and services that it was paid to provide. Non-current Liabilities Non-current liabilities refer to all liabilities that are not classified as current. 

Long-term financial liabilities: 

These include loans and notes or bonds payable, and are usually reported at amortized cost on the balance sheet. Upon maturity, the bond's amortized cost or carrying amount will be equal to its face value. 

Deferred tax liabilities: 

These arise from temporary timing differences between an entity's reported income (for financial statement purposes) and its taxable income (for tax purposes). Specifically, deferred tax liabilities occur whenever an entity's taxable income, and the actual income tax payable derived from it, is less than the reported financial statement income before taxes; and the income tax derived from it. . 

9. Classification of the items in Balance Sheet as per Schedule III of the Companies Act, 2013 

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