Università degli studi di Pavia - unipveconomia.unipv.it/pagp/pagine_personali/lbigogno/Lesson 1...

Università degli studi di PaviaFacoltà di Economia

a.a. 2013-2014

Lesson 1 International Accounting Lelio Bigogno, Stefano Santucci

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Introduction to the course

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�Lecturers presentation and CVs�News from 2013/2014: the seminars�Structure of the course�How to prepare the exam�The contents of the exam�How to find out the tools for the preparation�Basic assumptions of the course

Topics

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International Accounting Course 2013/2014

Lecturers: Lelio Bigogno

Stefano Santucci

Seminars: Chiara Demartini

Starting 04/10/2013

Ending 20/12/2013

Timetable

Day Hour Room

Tuesday 14-16 Vialli

Friday 14-16 F

Number Date Lecturer Argument Material

1 04/10/2013 Bigogno, Santucci, Demartini Introduction to the Lecturer, exam, tools, general overview of IFRS/IAS framework, vocabulary, accounting methodology. Slides

2 08/10/2013 Santucci IAS 1 - Statement of comprehensive income, other schemes and related disclosures Slides and examples

3 11/10/2013 Bigogno IAS 1 - Statement of Financial Position & disclosures Slides and examples

4 15/10/2013 Bigogno IAS 16 - Tangible Assets Slides

5 18/10/2013 Santucci IAS 7 - Cash Flow Statement Slides

6 22/10/2013 Santucci IAS 38 - Intangible Assets Slides

7 25/10/2013 Bigogno IAS 36 - Impairment Slides

8 29/10/2013 Santucci IAS 17 - Leasing Slides

9 05/11/2013 Santucci Exercise - Intangible Exercise prepared by Lecturers

10 08/11/2013 Bigogno Exercise - Leasing & Tangible Exercise prepared by Lecturers

11 12/11/2013 Santucci IFRS 8 - Operating Segment Slides

12 15/11/2013 Bigogno IFRS 3 - Business combination Slides

13 19/11/2013 Santucci IAS 37 - Provisions, contingent liabilities and contingent assets Slides

14 22/11/2013 Bigogno IAS 2 - Inventory Slides

15 26/11/2013 Santucci IAS 18 - Revenues Slides

16 29/11/2013 Bigogno FTA - First Time Adoption Slides

17 03/12/2013 Santucci Exercise - IAS 37 Exercise prepared by Lecturers

18 06/12/2013 Bigogno Exercise - Impairment Exercise prepared by Lecturers

19 10/12/2013 Santucci Exercise - Intangible & Revenues (review of arguments if necessary) Exercise prepared by Lecturers

20 13/12/2013 Bigogno Exercise - Business combination (review of arguments if necessary) Exercise prepared by Lecturers

21 17/12/2013 Santucci Exercise - Inventory & Cash Flow (review of arguments if necessary) Exercise prepared by Lecturers

22 20/12/2013 Bigogno Exercise - FTA, course closing Exercise prepared by Lecturers

Seminars

1 22/11/2013 Demartini/Trucco Voluntary disclosure, audit risk and audit fees Room A 4pm-6pm

2 29/11/2013 Demartini/Ruggiero (Brighton) The performative role of the accounting language. The intangible assets perspective Room A 4pm-6pm

3 To be defined Demartini/Swanson Cost analysis and control in a healthcare organization TO BE DEFINED

Consulting Hours

Lecturer Day Time Note

Bigogno Friday 1-2 pm Please arrange the meeting by mail before with the Lecturer

Santucci Tuesday 1-2 pm Except for 1st October 2013

PART 1IAS/IFRS: a GeneralOverview

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�A basic question:

�IAS?�IAS/IFRS?�IFRS

�The answer?

1. Some definitions

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�International Accounting Standards (IASs) were issued by the IASC (International Accounting Standards Committee) from 1973 to 2000.

�The IASB (international Accounting Standards Board)replaced the IASC in 2001.

1. Some definitions

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Since then, the IASB

�has amended some IASs and hasproposed to amend others;�has replaced some IASs with newInternational Financial ReportingStandards (IFRSs);�has adopted or proposed certainnew IFRSs on topics for which therewas no previous IAS.

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…….IFRSs refers to the new numbered series of pronouncements that the IASB is issuing, as distinct from the International Accounting Standards (IASs) series issued by IASC.

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…….Broader definitionIFRSs refers to the entire body ofIASB pronouncements, includingstandards and interpretationsapproved by the IASB and IASsand SIC (Standing InterpretationCommission) interpretationsapproved by the predecessorInternational Accounting StandardsCommittee.

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In fact, through committees, both the IASC and the IASB also have issued Interpretations of Standards

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Interpretations of IASs and IFRSsare developed by the IFRSInterpretations Committee, whosename was changed from IFRIC(International Financial ReportingInterpretations Committee) inMarch 2010.

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The IFRS InterpretationsCommittee replaced the formerStanding InterpretationsCommittee (SIC) in March 2002

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The Interpretations Committee'smission is "to interpret the application ofInternational Accounting Standards(IASs) and International FinancialReporting Standards (IFRSs) andprovide timely guidance on financialreporting issues not specificallyaddressed in IASs and IFRSs, in thecontext of the IASB Framework, andundertake other tasks at the request ofthe IASB".

2. The advantage of International Accounting

14International Accounting – Lesson 1

GLOBALISATION – INTERNATIONALISATION

Markets Efficiency

Common Accounting Rules


The goal of the IFRS Foundationand the IASB is to develop, in thepublic interest, a single set of high-quality, understandable, enforceableand globally accepted financialreporting standards based uponclearly articulated principles.


IAS/IFRS adoption is considered asa quality improvement for financialinformation produced.

YES BUT, WHERE IS THE REALIMPROVEMENT COMPARED TOITAGAAP?


IAS/IFRS adoption is considered as aquality improvement, BUT somediscussions are still in place. Topics:

1) An extremely on-going world(updating needs, uncertain rules);

2) An assets side approach (fair valueadoption problems);

3) A complex set of rules but at the endof the day often less strict than localGAAP .

3. IFRSs and EuropeanCommunity

Standards issued by IASB must gothrough due process of endorsementbefore becoming law in EU.

All the standards and interpretationsare adopted in the form of Regulation.

International Accounting – Lesson 1 18

Endorsement process :

1. IASB issues a standard2. EFRAG (European Financial

Reporting Advisory Group) holdsconsultations with interest groups

3. EFRAG delivers its advice to theEuropean Commission whether thestandard meets the criteria ofendorsment.


4. SARG ( Standards Advice ReviewGroup) issues its opinion whetherEFRAG’S endorsement advice iswell -balanced and objective.

5. Based on the advice of EFRAG andthe opinion of SARG, theCommission prepares a draftendorsement Regulation.

6. ARC (Accounting RegulatoryCommittee) votes on theCommission proposal.


7. The European Parliament and theCouncil of the European Union have 3months to oppose the adoption of thedraft Regulation by the Commission

8. In case of favorable opinion or the 3months elapsed without opposition, theCommission adopts the draftRegulation.

9. The adopted Regulation is published inthe Official Journal and enters intoforce on the day laid down in theRegulation itself.


4. International Accounting Standards around the world


Country Status for listed companies

Argentina Required for fiscal years beginning on or after 1 January 2011

Australia Required for all private sector reporting entities and as the basis for public sector reporting since 2005

Brazil

Required for consolidated financial statements of banks and listed companies from 31 December 2010 and for individual company accounts progressively since January 2008

Canada Required from 1 January 2011 for all listed entities and permitted for private sector entities including not-for-profit organisations

China Substantially converged national standards


EuropeanUnion

All member states of the EU are required to use IFRSs as adopted by the EU for listed companies since 2005

France Required via EU adoption and implementation process since 2005

GermanyRequired via EU adoption and implementation process since 2005

India India is converging with IFRSs at a date to be confirmed.

Indonesia Convergence process ongoing; a decision about a target date for full compliance with IFRSs is expected to be made in 2012

Italy Required via EU adoption and implementation process since 2005

Japan Permitted from 2010 for a number of international companies; decision about mandatory adoption by 2016 expected around 2012

Mexico Required from 2012


Republic of Korea Required from 2011

Russia Required for banking institutions and some other securities issuers; permitted for other companies

Saudi Arabia Not permitted for listed companies

South Africa Required for listed entities since 2005

Turkey Required for listed entities since 2005

United Kingdom Required via EU adoption and implementation process since 2005

United States

Allowed for foreign issuers in the US since 2007; target date for substantial convergence with IFRSs is 2011 and decision about possible adoption for US companies expected in 2011.

PART II Basic Accounting: Some technicalvocabulary

1. Sources records and book of prime entry

2. Ledger accounts and double entry3. Examples


1. Sources records and book of prime entry


Sources

Documents are the source of all informationrecorded by a business .

Documents which are used to record thebusiness transactions in the books of accountinclude:

quotation, sales order, purchase order, goodsreceived note, goods despatched note,statement, credit note, debit note, remittanceadvice, receipt, invoices.


Invoices: relate to a sales order or apurchase order

Credit note: relates to returned goods orrefunds when a customer has beenovercharged (regarded as a negativeinvoice)

Other documents :

debit notes : might be issued to adjust aninvoice already issued

goods received notes : record a receipt ofgoods (most commonly in a warehouse)


Books of prime entry

The details of source documents need to berecorded; the records are recorded in books ofprime entry ,which are:

• Sales day book

• Purchase day book

• Sales returns day book

• Journal

• Cash book

• Petty cash book


Sales day book : for credit sales

Purchase day book : for credit purchases

Sales returns day book : for credit notesraised

Purchase returns day book : for creditnotes received from suppliers

Journal: for transaction which are notrecorded in any of the other books ofprime entry


Cash book : for cash receipts andpayments

It records all transaction that go throughthe bank account.

Reconciliation of bank statement andcash book

Petty cash book : for small payments.

A petty cash system is usually subject tostrict controls

Payments are made in respect ofauthorised claims

All claims are supported by evidence


2. Ledger accounts and double entryWhy do we need ledger account ?

Ledger accounts summarise all theindividual transaction listed in the books ofprime entry .

Record of transaction, assets and liabilities:

• in chronological order

• built up in cumulative totals

The method used to summarize records isledger accounting and double entry

The nominal ledger


Nominal ledger is an accounting record which summarises the financial affairs of a business

The nominal ledger contains detail of:

• assets

• liabilities

• capital

• income and expenditure and

• profit and loss

The accounting equation


The accounting equation emphasises the equality between assets and liabilities ( including capital as liability)

Accounting equation is:

ASSETS=CAPITAL + LIABILITIES



Liabilities are trade accounts payable;

A payable is a person to whom a business owesmoney

Trade account payable are debts arising from thepurchase of material,components or goods forresale

Assets are trade accounts receivable



Drawings are amount of money taken out of a business by its owner



Matching convention

revenue earned is matched with the expenses incurred in earning it.

Double entry bookkeeping


Double entry bookkeeping: each transaction hasan equal but opposite effect .

Every accounting event must be entered in ledgeraccounts both as a debit and as an equal butopposite credit.

Weekly or monthly, totals are transferred frombooks of prime entry into the nominal ledger.

Every transaction has two effects (dual effect)



A debt entry will

• increase an asset

• decrease a liability

• increase an expense

A credit entry will

• decrease an asset

• increase a liability

• increase income



Every financial transaction gives rise to two accounting entries (a debit and a credit)

Debit entries in the nominal ledger is therefore always equal at any time to the total value of credit entries.

Every transaction is recorded twice

every debit is balanced by a credit



A cash payment is a credit entry in the cash account

The asset is decreasing.

Cash may be paid out to pay an expense or to purchase an asset . The matching debit entry is therefore made in the appropriate expense or asset account



A cash receipt is a debit entry in a cash account.

The asset is increasing.

Cash might be received by a retailer who makes a cash sale.

The credit entry would be made in the sales account

The rules of double entry bookeeping


In terms of 'T' accounts:

ASSET LIABILITY CAPITAL

DEBIT $ CREDIT $ DEBIT $ CREDIT $ DEBIT $ CREDIT $Increase Decrease Decrease Increase Decrease Increase

For income and expenses, think about profit. Profit retained in the business increases capital. Income increases profit and expenses decrease profit.

INCOME EXPENSE

DEBIT $ CREDIT $ DEBIT $ CREDIT $Decrease Increase Increase Decrease

Credit transaction


Not all transaction are settled immediately in cash or by cheque.

It’s possible:

• purchase goods or non-current on credit terms so that the suppliers would be trade accounts payable until settlement was made in cash

• grant credit terms to its customers who would be trade accounts receivable of the business

Examples of accounts in the nominal ledger

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Examples of accounts in the nominal ledger include the following:

(a) Plant and machinery at cost (b) Motor vehicles at cost (c) Plant and machinery, provision for depreciation(d) Motor vehicles, provision for depreciation(e) Proprietor's capital(f) Inventories – raw materials(g) Inventories – finished goods (h) Total trade accounts receivable(i) Total trade accounts payable

International Accounting – Lesson 1

Examples of accounts in the nominal ledger

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(j) Wages and salaries (k) Rent and local taxes (l) Advertising expenses (m) Bank charges (n) Motor expenses(o) Telephone expenses(p) Sales(q) Total cash or bank overdraft


Examples: the accounting equation

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Mr XY starts a business. The business begins by owning the cash that he has put into it, $2,500.The business is a separate entity in accounting terms and so it owes the money to Mr XY as capital. When Mr XY sets up his business:Capital invested = $2,500Cash = $2,500Capital invested is a form of liability, because it is an amount owed by the business to its owner(s).Adapting this to the idea that assets and liabilities are always equal amounts, we can state the accounting equation as follows.As at 1 July 20X6:Assets = Capital + Liabilities$2,500 (cash) = $2,500 + $0Mr XY purchases a market stall from Mr K, who is retiring from his fruit and vegetables business. The cost of the stall is $1,800.



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He also purchases some flowers and potted plants from a trader in the wholesale market, at a cost of $650. This leaves $50 in cash, after paying for the stall and goods for resale, out of the original $2,500.The assets and liabilities of the business have now altered, and at 3 July before trading begins, the state of his business is as follows.Assets = Capital + Liabilities

Stall 1,800 = $2,500 + $0Flower and plants 650Cash 50

2,500

The stall and the flowers and plants are physical items, but they must be given a money value. This money value is usually what they cost the business (called historical cost in accounting terms).



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On 3 July Mr XY has a very successful day. He sells all of his flowers and plants for $900 cash.Since he has sold goods costing $650 to earn revenue of $900, we can say that he has earned a profit of $250 on the day's trading.Profits belong to the owners of a business. In this case, the $250 belongs to MrXY. However, so long as the business retains the profits and does not pay anything out to its owners, the retained profits are accounted for as an addition to the proprietor's capital.

Assets = Capital + Liabilities

Stall 1,800 = Original investment $2,500 Flower and plants 0 Retained profitCash (50 + 900) 950 (900-650) 250

2750 2750 + 0



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At the beginning and end of 3 July 20X6, Mr XY’s financial position was as follows.

Net assets Capital

(a) At the beginning of the day: $(2,500 – 0) = $2,500 = $2,500

(b) At the end of the day: $(2,750 – 0) = $2,750 = $2,750

There has been an increase of $250 in net assets, which is the amount of profits earned during the day.



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The next market day is on 10 July and Mr XY purchases more flowers and plants for cash, at a cost of $740.He is not feeling well, because of a heavy cold, and so she decides to accept help for the day from his cousin Ethel. Ethel is to be paid a wage of $40 at the end of the day.Trading on 10 July was again very brisk, and Mr XY and Ethel sold all their goods for $1,100 cash. Mr XY paid Ethel her wage of $40 and drew out $200 for himself.Required(a) State the accounting equation before trading began on 10 July.(b) State the accounting equation at the end of 10 July, after paying Ethel:(i) but before drawings are made.(ii) after drawings have been made.



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(a) After the purchase of the goods for $740.

Assets = Capital + LiabilitiesStall 1,800Goods 740Cash (770 – 740) 30

2,570 = $ 2,570 + $0



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(b) On 10 July, all the goods are sold for $1,100 cash, and Ethel is paid $40. The profit for the day is $320.

$ $Sales 1,100Less cost of goods sold 740Ethel's wage 40

780Profit 320



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Stall 1,800 At beginning of 10 July 2,570Goods 0 Profits earned on 10 July 320Cash(30+ 1,100 – 40) 1,090

2,890 2,890 + 0



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After Mr XY has withdrawn $200 in cash, retained profits will be only $(320 – 200) = $120.


Stall 1,800 At beginning of 10 July 2,570Goods 0 Profits earned on 10 July 120Cash(1,090 -200) 890

2,690 2,690 + 0


Examples: the rules of double entry bookeeping

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In terms of 'T' accounts:

ASSET LIABILITY CAPITAL

DEBIT $ CREDIT $ DEBIT $ CREDIT $ DEBIT $ CREDIT $Increase Decrease Decrease Increase Decrease Increase

For income and expenses, think about profit. Profit retained in the business increases capital. Income increases profit and expenses decrease profit.

INCOME EXPENSE

DEBIT $ CREDIT $ DEBIT $ CREDIT $Decrease Increase Increase Decrease


Examples: double entry for cash transaction

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In the cash book of a business, the following transactions have been recorded.

(a) A cash sale (ie a receipt) of $250(b) Payment of a rent bill totalling $150(c) Buying some goods for cash at $100(d) Buying some shelves for cash at $200

How would these four transactions be posted to the ledger accounts and to which ledger accounts should they be posted? Don't forget that each transaction will be posted twice, in accordance with the rule of double entry.



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(a) The two sides of the transaction are:(i) Cash is received (debit entry in the cash at bank account).(ii) Sales increase by $250 (credit entry in the sales account).

CASH AT BANK ACCOUNT SALES ACCOUNT

Sales a/c 250 Cash a/c 250

(Note how the entry in the cash at bank account is cross-referenced to the sales account and vice-versa. This enables a person looking at one of the accounts to trace where the other half of the double entry can befound.)



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(b) The two sides of the transaction are:(i) Cash is paid (credit entry in the cash at bank account).(ii) Rent expense increases by $150 (debit entry in the rent account).

CASH AT BANK ACCOUNT RENT ACCOUNT

Rent a/c 150 Cash at bank a/c 150



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(c) The two sides of the transaction are:(i) Cash is paid (credit entry in the cash at bank account).(ii) Purchases increases by $100 (debit entry in the purchase account).

CASH AT BANK ACCOUNT PURCHASES ACCOUNT

Purchases100 Cash at bank a/c 100



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(d) The two sides of the transaction are:(i) Cash is paid (credit entry in the cash at bank account).(ii) Assets – in this case, shelves – increase by $200 (debit entry in shelves account).CASH AT BANK ACCOUNT SHELVES (ASSET) ACCOUNT

Shelves a/c 200 Cash at bank a/c 200


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