Chapter-01

Introduction
1. Understanding Annual report

An annual report is a comprehensive annual publication that a public limited company must
provide to shareholders to describe their operations and financial conditions throughout the
preceding year. Annual reports are intended to give shareholders and other interested people,
information about the company’s activities and financial performance. The front part of the
report often contains an impressive combination of graphics, photos and an accompanying
narrative, all of which chronicle the company’s activities over the past years. The back part of
the report contains detailed financial and operational information.

In the case of mutual funds, an annual report is a required document that is made available to
fund shareholders on a fiscal year basis. It discloses certain aspects of a fund’s operations and
financial condition. In contrast to corporate annual reports, mutual fund annual reports are
best described as “plain vanilla” in terms of their presentation.

Typically annual reports will include:

 Chairman’s Report
 CEO’S Report
 Letter to the Shareholders
 Narrative Text, Graphics and Photos, Listing of the company’s directors and
executive officers
 Summary of Financial Data
 Corporate Information
 Auditors report on corporate governance
 Mission statement
 Corporate governance statement of compliance
 Statement of directors’ responsibilities
 Invitation to the company’s AGM

As well as financial statements including:

 Auditors report on the financial statements
 Statement of Financial Position or Balance Sheet
 Statement of Changes in Equity
 Comprehensive Income Statement or Income Statement
 Statement of Cash Flows
 Notes to the Financial Statements
 Accounting Policies

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Other information deemed relevant to stakeholders may be included such as a report on
operations for manufacturing firms or corporate social responsibility for companies with
environmentally- or socially-sensitive operations. In the case of larger companies, it is
usually a sleek, colorful, high gloss publication.

The details provided in the report are of use to investors to understand the company’s
financial position and future direction. The financial statements are usually compiled in
compliance with IFRS and/or the domestic GAAP, as well as domestic legislation (e.g the
Company Act-1994 in the Bangladesh).

2. Target Audiences for Annual Reports

Current shareholders and potential investors remain the primary audiences for annual reports.
Employees (who today are also likely to be shareholders), customers, suppliers, community
leaders, and the community-at-large, however, are also targeted audiences.

Employees

The annual report serves many purposes with employees. It provides management with an
opportunity to praise employee innovation, quality, teamwork, and commitment, all of which
are critical companies in overall business success.

Customers

Customers want to work with quality suppliers of goods and services and an annual report
can help a company promote its images with customers by highlighting its corporate mission
and core values.

Suppliers

A company’s abilities to meet its customer’s requirements will be seriously compromised if it

is saddled with inept or undependable suppliers. Successful companies today quickly weed
out such companies. By highlighting internal measurements of quality, innovation, and
commitment, annual reports can send an implicit message to suppliers about the company’s
expectations of outside vendors.

The Community

Companies invariably pay a great deal of attention to their reputation in the community or
communities in which they operate, for their reputations as corporate citizens can have a
decisive impact on bottom line financial performance.

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3. Meaning of Financial Reporting

Financial reporting includes not only financial statements but also other means of
communicating information that relates, directly or indirectly, to the information provided by
the accounting system-that is, information about the enterprises, obligations, earnings etc.

4. Meaning of Corporate Reporting

Corporate reports aim to provide information about the resources and performance of the
reporting entity to users of such reports.

It includes-
 Historical financial information regarding their performance
 Chairman’s reports on the performance and strategy of the company
 Non-financial information (not mandatory in IFRS) such as environment, employees
and society

5. Usefulness of Corporate Reporting

 To satisfy statutory requirements-taxing authority

 To compare financial information from different entities
 To be more transparent in their reporting-by providing disclosures in financial
statements
 To make commentary on the performance of the business-disclose the nature of the
business as well as the objectives, strategies, results, prospects etc.
 To give the accessibility of the company information to the users
 To increased disclosure of non-financial information

6. Compliance with Accounting Standards

 Corporate report must be complied with IAS and IFRS

 Corporate report must be complied with local laws and rules
 The directors of a company must amend their financial statements to remove any
departures from requirements.

7. Conceptual Framework

7.1 Definition of conceptual Framework

A conceptual framework is a constitution, a coherent system of interrelated objectives and

fundamentals that can be lead to consistent standards and that prescribes the nature,
function and limits of financial accounting and financial statements.
 The objectives identify the goals and the purpose of accounting

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  The fundamentals are the underlying concepts of accounting that guide the selection
of transactions, events and circumstances to be accounted for, their recognition and
measurement, and the means of summarizing and communicating them to interested
parties

7.2 Purpose of Conceptual Framework

1. Define the boundaries of accounting by providing:

 The basic objectives and users
 Definition of key terms
 Establish fundamental concepts
2. Assist the FASB in standard setting by providing a basis for developing new and
revised standards.
3. Provide a description of current practice and a frame of reference for new issues.
4. Assist accountants and others in selecting between acceptable accounting alternatives.

7.3 What is included in the Conceptual Framework?

SFAC No. 1. “Objectives of Financial Reporting by Business Enterprises” presents the goals
and purposes of accounting.
SFAC = Statement of Financial Accounting Concepts
SFAC No. 2. “Qualitative Characteristics of Accounting Information” examines the
characteristics that make accounting information useful.

SFAC No. 6. “Elements of Financial Statements” defines the broad classifications of items
found in financial statements and replaces SFAC No. 3, expanding its scope to include not-
for profit organization.

SFAC No. 4. “Objectives of Financial Reporting for Non-business Organizations” provides

guidelines for not-for-profit and governmental entities.

SFAC No. 5. “Recognition and Measurement in Financial Statements of Business

Enterprises” giving guidance on what information should be formally incorporated into
financial statements and when.
SFAC No. 7. “Using Cash Flow Information and Present Value in Accounting
Measurements,” provides a framework for using expected future cash flows and present
values as a basis for measurement.

SFAC No. 8. Chapter 1, “The Objective of General Purpose Financial Reporting,” and Chapter
3, “Qualitative Characteristics of Useful Financial Information,” replaces SFAC No. 1 and
No. 2.

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SFAC No. 1 “Objectives of Financial Reporting by Business Enterprises”

1. Defines the users of accounting information.

 Present and potential investors and creditors
 Defines the users as the average prudent users with a reasonable understanding
of economic and business situation.
2. Define the objectives of financial reporting.

 To provide information that is useful in making rational investment, credit and

similar decisions
 To help users assess the timing and uncertainty of cash flows
 To provide information on economic resources, claims and changes in them.

SFAC No. 2 “Qualitative Characteristics of Accounting Information”

Concept statement no. 2 identifies primary and secondary qualitative characteristics of

accounting information that distinguish better (more useful) information from inferior (less
useful) information for decision-making purposes.

1. Primary Qualities

The primary qualities that make accounting information useful for making are
relevance and reliability.

Relevance: Accounting information is relevant if it is capable of making a difference

in a decision. For information to be relevant, it should have-
a. Predictive or feedback value, and
b. It must be presented on a timely basis.
Reliability: Accounting information is reliable to the extent that it is verifiable, is a
faithful representation and is reasonably free of error and basis. To be reliable,
accounting information must include:
a. Verifiability,
b. Representational faithfulness, and
c. Neutrality.

2. Secondary Qualities

The secondary qualities identified are comparability and consistency.

Comparability: Accounting information that has been measured and reported in a
similar manner for different enterprises is considered comparable.

Consistency: Accounting information is consistent when an entity applies the same

accounting treatment to similar events from period to period.
SFAC No. 6. “Elements of Financial Statements”

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IASB (5) = Assets, Liabilities, Revenue, Expense, Equity [Capital + (Revenue – Expense)
– Drawings]
FASB (10) =
Basic Elements

Assets

Probable future economic benefits obtained or controlled by a particular entity as a result of

past transactions or events.

 Future economic benefits

 Controlled by a particular entity
 Past transactions or events

Liabilities

Probable future sacrifices of economic benefits that arise 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.

 Sacrifices or outflow of economic benefits

 Obligations
 Past transactions or events

Equity
Equity is the residual interest in the assets of an entity that remains after deducting its all
liabilities. In a business enterprise, the equity is the ownership interest.

Investment by Owners

Increase in net assets of a particular enterprise resulting from transfers to it from other entities
of something of value to obtain or increase ownership interest (or equity) in it. Assets are
most commonly received as investments by owners, but that which is received may include
services or satisfaction or conversion of liabilities of the enterprise.

Distribution to Owners

Decrease in net assets of a particular enterprise that result from transferring assets, rendering
services, or incurring liabilities by the enterprise to the owners. Distributions to owners
decrease ownership interest (or equity) in an enterprise.

Comprehensive Income

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Change in equity (net assets) of an entity during a period from transactions and other events
and circumstances from non owner sources. It includes all changes in equity during a period,
except those resulting from investments by owners and distributions to owners.

Revenues

Inflows or others enhancements of assets of an entity or settlement of its liabilities (or a

combination of both) during a period from delivering or producing goods, rendering services,
or other activities that constitute the entity’s ongoing major or central operations.

Expenses

Expenses are decreases in economic benefits during an accounting period, other than
distribution to shareholders. It can arises from outflows or other using up of assets or
incurrence of liabilities (or a combination of both) during a period from delivering or
producing goods, rendering services, or carrying out other activities that constitute the
entity’s ongoing major or central operations.

Gains

Increase in equity (net assets) from peripheral or incidental transactions of an entity and from
all other transactions and other events and circumstances affecting the entity during a period
except those that result from revenues or investments by owners.

Losses

Decrease in equity (net assets) from peripheral or incidental transactions of an entity from all
other transactions and other events and circumstances affecting the entity during a period
except those that result from expenses or distributions to owners.

SFAC No. 5. “Recognition and Measurement in Financial Statements of Business

Enterprises”

Basic Assumptions

Economic Entity Assumptions

The economic activities of an entity can be accumulated and reported in a manner that
assumes the entity is separate and distinct from its owners or other business units.

Going-Concern Assumptions

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In the absence of contrary information, a business entity is assumed to remain in existence for
an indeterminate period of time. The current relevance of the historical cost principle is
dependent on the ongoing assumption.
Depreciation is the charge of an asset over its estimated useful life
Monetary Unit Assumption

Economic activities of an entity are measured and reported in dollars. These dollars are
assumed to remain relatively stable over the years in terms of purchasing power. In essence,
this assumption disregards any inflation or deflation in the economy in which the entity
operates.

Periodicity Assumption

The life of an economic entity can be divided into artificial time periods for the purpose of
providing periodic reports on the economic activities of the entity.

Basic Principles

Historical Cost Principle

Acquisition cost is the most objective and verifiable basis upon which to account for assets
and liabilities of a business enterprise. Cost has been found to be more definite and
determinable than other suggested valuation methods.

Revenue Recognition Principle

Revenue is recognized when the earning process is virtually complete and an exchange
transaction has occurred. Generally, this takes place when a sale to another individual or
independent entity has been confirmed. Confirmation is usually accomplished by a transfer of
ownership in an exchange transaction.

Matching Principle

Accountants attempt to match expenses incurred while earning revenues with the related
revenues. Use of accrual accounting procedures assists the accountant in allocating revenues
and expenses properly among the fiscal periods that compose the life of a business enterprise.

Full Disclosure

In the presentation of financial statements, the accountant should include sufficient

information to permit the knowledgeable reader to make an informed judgment about the
financial condition of the enterprise in question.

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Constraints

Cost-Benefit Relationship

This constraint relates to the notion that the benefits to be derived from providing certain
accounting information should exceed the costs providing that information. The difficulty in
cost-benefit analysis is that the costs and especially the benefits are not always evident or
measurable.

Materiality

In the application of basic accounting theory, an amount may be considered less important
because of its size in comparison with revenue and expenses, assets and liabilities, or net
income. Deciding when an amount is material in relation to other amounts is a matter of
judgments and professional expertise.

Industry Practices

Basic accounting theory may not apply with equal relevance to every industry that accounting
must serve. The fair presentation of financial position and results operations for a particular
industry may require a departure from basic accounting theory because of the peculiar nature
of an event or practice common only to that industry.

Conservatism

When in doubt, an accountant should choose a solution that will be least likely to overstate
assets and income. The conservatism constraint should be applied only when doubt exists. An
intentional understatement of assets or income is not acceptable accounting.

Anticipate no profit, Provide for all possible losses.

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 Chapter-02
Institutional Setting and Development of Financial
Reporting Systems

1. American Institute of Certified Public Accountants (AICPA)

The American Institute of Certified Public Accountants (AICPA) is the national,
professional association of Certified Public Accountants (CPAs) in the United States, with
more than 360,000 members, including CPAs in business and industry, public practice,
government, and education; student affiliates; and international associates. The AICPA
maintains offices in New York City; Washington, DC; Durham, NC; Ewing, NJ; and
Lewisville, TX.

History
The AICPA and its predecessors have a history dating back to 1887, when the American
Association of Public Accountants (AAPA) was formed. In 1916, the American Association
was succeeded by the Institute of Public Accountants, at which time there was a membership
of 1,150. The name was changed to the American Institute of Accountants in 1917 and
remained so until 1957, when it changed to its current name of the American Institute of
Certified Public Accountants. The American Society of Certified Public Accountants was
formed in 1921 and acted as a federation of state societies. The Society was merged into the
Institute in 1936 and, at that time, the Institute agreed to restrict its future members to CPAs.

Professional standards setting

The AICPA sets generally accepted professional and technical standards for CPAs in many
areas. Until the 1970s, the AICPA held a virtual monopoly in this field. In the 1970s,
however, it transferred its responsibility for setting generally accepted accounting principles
(GAAP) to the newly formed Financial Accounting Standards Board (FASB.) Following this,
it retained its standards setting function in areas such as financial statement auditing,
professional ethics, attest services, CPA firm quality control, CPA tax practice, Business
Valuation, and financial planning practice. Before passage of the Sarbanes-Oxley law,
AICPA standards in these areas were considered "generally accepted" for all CPA
practitioners.

In the early 2000s, federal public policy makers concluded that where independent financial
statement audits of public companies regulated by the U.S. Securities and Exchange
Commission are concerned, that the AICPA's standards setting and related enforcement roles
should be transferred to a government empowered body with more enforcement authority
than a non-governmental professional association, such as the AICPA could provide. As a
result, the Sarbanes-Oxley law created the Public Company Accounting Oversight Board
(PCAOB) which has jurisdiction over virtually every area of CPA practice in relation to
public companies. However, the AICPA retains its considerable standards setting, ethics
enforcement and firm practice quality monitoring roles for the majority of practicing CPAs,
who serve privately held business and individuals.

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2. The Financial Accounting Standards Board (FASB)
The Financial Accounting Standards Board (FASB) is a private, not-for-profit
organization whose primary purpose is to develop generally accepted accounting principles
(GAAP) within the United States in the public's interest. The Securities and Exchange
Commission (SEC) designated the FASB as the organization responsible for setting
accounting standards for public companies in the U.S. It was created in 1973, replacing the
Committee on Accounting Procedure (CAP) and the Accounting Principles Board (APB) of
the American Institute of Certified Public Accountants (AICPA).

Mission statement

The FASB's mission is "to establish and improve standards of financial accounting and
reporting for the guidance and education of the public, including issuers, auditors, and users
of financial information."[1] To achieve this, FASB has five goals[1]:

 Improve the usefulness of financial reporting by focusing on the primary

characteristics of relevance and reliability, and on the qualities of comparability and
consistency.
 Keep standards current to reflect changes in methods of doing business and in the
economy.
 Consider promptly any significant areas of deficiency in financial reporting that might
be improved through standard setting.
 Promote international convergence of accounting standards concurrent with
improving the quality of financial reporting.
 Improve common understanding of the nature and purposes of information in
financial reports.

Description

The FASB is not a governmental body. The SEC has legal authority to establish financial
accounting and reporting standards for publicly held companies under the Securities
Exchange Act of 1934. Throughout its history, however, Commission policy has been to rely
on the private sector for this function to the extent that the private sector demonstrates ability
to fulfill the responsibility in the public interest.[citation needed]

The FASB is part of a structure that is independent of all other business and professional
organizations. Before the present structure was created, financial accounting and reporting
standards were established first by the Committee on Accounting Procedure of the American
Institute of Certified Public Accountants (1936–1959) and then by the Accounting Principles
Board, also a part of the AICPA (1959–73). Pronouncements of those predecessor bodies
remain in force unless amended or superseded by the FASB.

The FASB is subject to oversight by the Financial Accounting Foundation (FAF), which
selects the members of the FASB and the Governmental Accounting Standards Board and
funds both organizations. The Board of Trustees of the FAF, in turn, is selected in part by a
group of organizations including:

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  American Accounting Association
 American Institute of Certified Public Accountants
 CFA Institute
 Financial Executives International
 Government Finance Officers Association
 Institute of Management Accountants
 National Association of State Auditors, Comptrollers and Treasurers
 Securities Industry Association

Creation of the Codification

On July 1, 2009, the FASB announced the launch of its Accounting Standards Codification,
declaring it to be "the single source of authoritative nongovernmental U.S. generally accepted
accounting principles." The Codification organizes the many pronouncements that constitute
U.S. GAAP into a consistent, searchable format. [3] The Codification is not to be confused
with the FASB's Conceptual Framework, a project begun in 1973 to develop a sound
theoretical basis for the development of accounting standards in the United States.

FASB pronouncements
Main article: List of FASB Pronouncements

In order to establish accounting principles, the FASB issues pronouncements publicly, each
addressing general or specific accounting issues. These pronouncements are:

 Statements of Financial Accounting Standards

 Statements of Financial Accounting Concepts
 FASB Interpretations
 FASB Technical Bulletins
 EITF Abstracts

FASB 11 Concepts
 Money measurement
 Entity
 Going concern
 Cost
 Dual aspect
 Accounting period

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  Conservation[disambiguation needed]
 Realization
 Matching
 Consistency
 Materiality

3. Standards Vs Principles
To answer this question, we must first define what IAS and GAAP are, in order to get a better
grasp of the function they serve in the world of accounting.

The acronym "IAS" stands for International Accounting Standards. This is a set of accounting
standards set by the International Accounting Standards Committee (IASC), located in
London, England. The IASC has a number of different bodies, the main one being the
International Accounting Standards Board (IASB), which is the standard-setting body of the
IASC. The acronym "GAAP" stands for Generally Accepted Accounting Principles.

The IASC does not set GAAP, nor does it have any legal authority over GAAP. The IASC
can be thought of as merely a very influential group of people who love making up
accounting rules. However, a lot of people actually do listen to what the IASC and IASB
have to say on matters of accounting.

When the IASB sets a brand new accounting standard, a number of countries tend to adopt
the standard, or at least interpret it, and fit it into their individual country's accounting
standards. These standards, as set by each particular country's accounting standards board,
will in turn influence what becomes GAAP for each particular country. For example, in the
United States, the Financial Accounting Standards Board (FASB) makes up the rules and
regulations which become GAAP.

The best way to think of GAAP is as a set of rules that accountants follow. Each country has
its own GAAP, but on the whole, there aren't many differences between countries -
interpretations might vary from country to country, but everyone tends to agree that a
company can't simply make up billions of dollars worth of revenue and put it on its books.
Every country, in turn, influences the other countries that follow GAAP.

4. International Accounting Standards Board (IASB)

The International Accounting Standards Board (IASB) is an independent, privately-funded
accounting standard-setter based in London, England.

The IASB was founded on April 1, 2001 as the successor to the International Accounting
Standards Committee (IASC). It is responsible for developing International Financial
Reporting Standards (IFRS) (the new name for International Accounting Standards issued
after 2001), and promoting the use and application of these standards.

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Foundation of the IASB

In April 2001, the International Accounting Standards Committee Foundation (IASCF), since
renamed as the IFRS Foundation, was formed as a not-for-profit corporation incorporated in
the US state of Delaware. The IFRS Foundation is the parent entity of the International
Accounting Standards Board (IASB), an independent accounting standard-setter based in
London, England.

On 1 March 2001, the IASB assumed accounting standard-setting responsibilities from its
predecessor body, the International Accounting Standards Committee (IASC). This was the
culmination of a restructuring based on the recommendations of the report Recommendations
on Shaping IASC for the Future.

The IASB structure has the following main features: the IFRS Foundation is an independent
organization having two main bodies, the Trustees and the IASB, as well as a IFRS Advisory
Council and the IFRS Interpretations Committee (formerly the IFRIC). The IASC Foundation
Trustees appoint the IASB members, exercise oversight and raise the funds needed, but the
IASB has responsibility for setting International Financial Reporting Standards (international
accounting standards).

IASB Members

The IASB has 15 Board members, each with one vote. They are selected as a group of
experts with a mix of experience of standard-setting, preparing and using accounts, and
academic work.

The IFRS Interpretations Committee has 14 members. Its brief is to provide timely guidance
on issues that arise in practice.

A unanimous vote is not necessary in order for the publication of a Standard, exposure draft,
or final "IFRIC" Interpretation. The Board's 2008 Due Process manual stated that approval by
nine of the members is required.

IASB Due Process

The IASB Handbook describes the consultative arrangements of the IASB. The Board also
publishes a brief guide on how standards are developed.

Funding

The IFRS Foundation raises funds for the operation of the IASB. Most contributors are banks
and other companies which use or have an interest in promoting international standards. In
2008, American companies gave £2.4m, more than those of any other country. However,
contributions fell in the wake of the financial crisis of 2007–2010, and a shortfall was
reported in 2010.

5. International Financial Reporting Standards (IFRS)

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International Financial Reporting Standards (IFRS) are principles-based Standards,
Interpretations and the Framework (1989)[1] adopted by the International Accounting
Standards Board (IASB).

Many of the standards forming part of IFRS are known by the older name of International
Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the
International Accounting Standards Committee (IASC). On 1 April 2001, the new IASB took
over from the IASC the responsibility for setting International Accounting Standards. During
its first meeting the new Board adopted existing IAS and SICs. The IASB has continued to
develop standards calling the new standards IFRS.

Requirements of IFRS

IFRS financial statements consist of (IAS1.8)

 a Statement of Financial Position

 a Statement of Comprehensive Income or two separate statements comprising
an Income Statement and separately a Statement of Comprehensive Income,
which reconciles Profit or Loss on the Income statement to total
comprehensive income
 a Statement of Changes in Equity (SOCE)
 a Cash Flow Statement or Statement of Cash Flows
 notes, including a summary of the significant accounting policies

Comparative information is required for the prior reporting period (IAS 1.36). An entity
preparing IFRS accounts for the first time must apply IFRS in full for the current and
comparative period although there are transitional exemptions (IFRS1.7).

On 6 September 2007, the IASB issued a revised IAS 1 Presentation of Financial Statements.
The main changes from the previous version are to require that an entity must:

 present all non-owner changes in equity (that is, 'comprehensive income' )

either in one Statement of comprehensive income or in two statements (a
separate income statement and a statement of comprehensive income).
Components of comprehensive income may not be presented in the Statement
of changes in equity.
 present a statement of financial position (balance sheet) as at the beginning of
the earliest comparative period in a complete set of financial statements when
the entity applies the new standard.
 present a statement of cash flow.
 make necessary disclosure by the way of a note.

The revised IAS 1 is effective for annual periods beginning on or after 1 January 2009. Early
adoption is permitted.

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IASB current projects

Much of its work is directed at convergence with US GAAP.

Adoption of IFRS

IFRS are used in many parts of the world, including the European Union, Hong Kong,
Australia, Malaysia, Pakistan, GCC countries, Russia, South Africa, Singapore and Turkey.
As of 27 August 2008, more than 113 countries around the world, including all of Europe,
currently require or permit IFRS reporting. Approximately 85 of those countries require IFRS
reporting for all domestic, listed companies. In addition, the US is also gearing towards IFRS.
The SEC in the US is slowly but progressively shifting from requiring only US GAAP to
accepting IFRS and will most likely accept IFRS standards in the long-term.

It is generally expected that IFRS adoption worldwide will be beneficial to investors and
other users of financial statements, by reducing the costs of comparing alternative
investments and increasing the quality of information. Companies are also expected to
benefit, as investors will be more willing to provide financing. However, Ray J. Ball has
expressed some skepticism of the overall cost of the international standard; he argues that the
enforcement of the standards could be lax, and the regional differences in accounting could
become obscured behind a label. He also expressed concerns about the fair value emphasis of
IFRS and the influence of accountants from non-common-law regions, where losses have
been recognized in a less timely manner.

List of Reporting Standards and International Accounting Standards

([Link]
Originally Fully
No. Title Effective Superseded by
issued withdrawn
Disclosure of
Accounting Policies
(1975) January 1,
IAS 1 1975
Presentation of 1975
Financial Statements
(1997)
Valuation and
Presentation of
Inventories in the
January 1,
IAS 2 Context of the 1976
1976
Historical Cost System
(1975)
Inventories (1993)
Consolidated Financial January 1, IAS 27 and IAS
IAS 3 1976 January 1, 1990
Statements 1977 28
Depreciation January 1,
IAS 4 1976 July 1, 1999 IAS 36
Accounting 1977
Information to Be
January 1,
IAS 5 Disclosed in Financial 1976 July 1, 1998 IAS 1
1977
Statements
Accounting Responses January 1,
IAS 6 1977 January 1, 1983 IAS 15
to Changing Prices 1978
IAS 7 Statement of Changes 1977 January 1,

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 Originally Fully
No. Title Effective Superseded by
issued withdrawn
in Financial Position
(1977)
Cash Flow
1979
Statements (1992)
Statement of Cash
Flows (2007)
Unusual and Prior
Period Items and
Changes in Accounting
Policies (1978)
Net Profit or Loss for
the Period,
Fundamental Errors January 1,
IAS 8 1978
and Changes in 1979
Accounting Policies
(1993)
Accounting Policies,
Changes in Accounting
Estimates and Errors
(2003)
Accounting for
January 1,
IAS 9 Research and 1978 July 1, 1999 IAS 38
1980
Development Activities
Contingencies and
Events Occurring After
the Balance Sheet Date
(1978)
Events After the January 1,
IAS 10 1978
Balance Sheet Date 1980
(1999)
Events after the
Reporting Period
(2007)
Accounting for
Construction Contracts
January 1,
IAS 11 (1979) 1979 IFRS 15
1980
Construction Contracts
(1993)
Accounting for Taxes
January 1,
IAS 12 on Income (1979) 1979
1981
Income Taxes (1996)
Presentation of Current
January 1,
IAS 13 Assets and Current 1979 July 1, 1998 IAS 1
1981
Liabilities
Reporting Financial
Information by
January 1,
IAS 14 Segment (1981) 1981 January 1, 2009 IFRS 8
1983
Segment reporting
(1997)
Information Reflecting
January 1,
IAS 15 the Effects of Changing 1981 January 1, 2005 N/A
1983
Prices
IAS 16 Accounting for 1982 January 1,

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 Originally Fully
No. Title Effective Superseded by
issued withdrawn
Property, Plant and
Equipment (1982)
1983
Property, Plant and
Equipment (1993)
Accounting for Leases
January 1,
IAS 17 (1982) 1982 January 1, 2019 IFRS 16
1984
Leases (1997)
Revenue Recognition
January 1,
IAS 18 (1982) 1982 January 1, 2018 IFRS 15
1984
Revenue (1993)
Accounting for
Retirement Benefits in
Financial Statements of
Employers (1983) January 1,
IAS 19 1983
Retirement Benefit 1985
Costs (1993)
Employee Benefits
(1998)
Accounting for
Government Grants January 1,
IAS 20 1983
and Disclosure of 1984
Government Assistance
Accounting for the
Effects of Changes in
Foreign Exchange
Rates (1983) January 1,
IAS 21 1983
The Effects of 1985
Changes in Foreign
Exchange Rates
(1993)
Accounting for
Business Combinations
January 1,
IAS 22 (1983) 1983 April 1, 2004 IFRS 3
1985
Business Combinations
(1993)
Capitalisation of
Borrowing Costs
January 1,
IAS 23 (1984) 1984
1986
Borrowing Costs
(1993)
Related Party January 1,
IAS 24 1984
Disclosures 1986
Accounting for January 1, IAS 39 and IAS
IAS 25 1986 January 1, 2001
Investments 1987 40
Accounting and
Reporting by January 1,
IAS 26 1987
Retirement Benefit 1988
Plans
IAS 27 Consolidated Financial 1989 January 1,
Statements and 1990
Accounting for
Investments in

Page 18 of 55
 Originally Fully
No. Title Effective Superseded by
issued withdrawn
Subsidiaries (1989)
Consolidated and
Separate Financial
Statements (2003)
Separate Financial
Statements (2011)
Accounting for
Investments in
Associates (1989)
Investments in
January 1,
IAS 28 Associates & 1989
1990
ASSOCIATES (2003)
Investments in
Associates and Joint
Ventures (2011)
Financial Reporting in
January 1,
IAS 29 Hyperinflationary 1989
1990
Economies
Disclosures in the
Financial Statements January 1,
IAS 30 1990 January 1, 2007 IFRS 7
of Banks and Similar 1991
Financial Institutions
Financial Reporting of
Interests in Joint
January 1, IFRS
IAS 31 Ventures (1990) 1990 January 1, 2013
1992 11 and IFRS 12
Interests in Joint
Ventures (2003)
Financial Instruments:
Disclosure and
January 1,
IAS 32 Presentation (1995) 1995
1996
Financial Instruments:
Presentation (2005)
January 1,
IAS 33 Earnings per Share 1997
1999
Interim Financial January 1,
IAS 34 1998
Reporting 1999
Discontinuing
IAS 35 1998 July 1, 1999 January 1, 2005 IFRS 5
Operations
IAS 36 Impairment of Assets 1998 July 1, 1999
Provisions, Contingent
IAS 37 Liabilities and 1998 July 1, 1999
Contingent Assets
IAS 38 Intangible Assets 1998 July 1, 1999
Financial Instruments:
January 1,
IAS 39 Recognition and 1998 January 1, 2018 IFRS 9
2001
Measurement
January 1,
IAS 40 Investment Property 2000
2001
January 1,
IAS 41 Agriculture 2000
2003

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 Originally Fully
No. Title Effective Superseded by
issued withdrawn
First-time Adoption of
January 1,
IFRS 1 International Financial 2003
2004
Reporting Standards
January 1,
IFRS 2 Share-based Payment 2004
2005
Business
IFRS 3 2004 April 1, 2004
Combinations
January 1,
IFRS 4 Insurance Contracts 2004 January 1, 2021 IFRS 17
2005
Non-current Assets
Held for Sale and January 1,
IFRS 5 2004
Discontinued 2005
Operations
Exploration for and
January 1,
IFRS 6 Evaluation of Mineral 2004
2006
Resources
Financial
January 1,
IFRS 7 Instruments: 2005
2007
Disclosures
January 1,
IFRS 8 Operating Segments 2006
2009
2009 January 1,
IFRS 9 Financial Instruments
(updated 2014) 2018
Consolidated Financial January 1,
IFRS 10 2011
Statements 2013
January 1,
IFRS 11 Joint Arrangements 2011
2013
Disclosure of Interests January 1,
IFRS 12 2011
in Other Entities 2013
Fair Value January 1,
IFRS 13 2011
Measurement 2013
Regulatory Deferral January 1,
IFRS 14 2014
Accounts 2016
Revenue from
January 1,
IFRS 15 Contracts with 2014
2018
Customers
January 1,
IFRS 16 Leases 2016
2019
January 1,
IFRS 17 Insurance contracts 2017 2021

Adoptation Status of International Accounting Standards (IASs) by ICAB

IAS No. IAS Title IAS Effective Date Remarks

Presentation of Financial
1 on or after 1 Jan 2010
Statements
2 Inventories on or after 1 January 2007

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 7 Statement of Cash Flows on or after 1 January 1999
Accounting Policies, Changes in
8 on or after 1 January 2007
Accounting Estimates and Errors
Events after the Reporting
10 on or after 1 January 1999
Period
11 Construction Contracts on or after 1 January 1999
12 Income Taxes on or after 1 January 1999
16 Property, Plant & Equipment on or after 1 January 2007
17 Leases on or after 1 January 2007
18 Revenue on or after 1 January 2007
19 Employee Benefits on or after 1 January 2013
Accounting of Government
20 Grants and Disclosure of on or after 1 January 1999
Government Assistance
The Effects of Changes in
21 on or after 1 January 2007
Foreign Exchange Rates
23 Borrowing Costs on or after 1 January 2010
24 Related Party Disclosures on or after 1 January 2007
Accounting and Reporting by
26 on or after 1 January 2007
Retirement Benefit Plans
27 Separate Financial Statements on or after 1 January 2013
Investments in Associates and
28 on or after 1 January 2013
Joint Ventures
Financial Reporting in
IAS 29 on or after 1 January 2015
Hyperinflationary Economics
31 Interest in Joint Ventures on or after 1 January 2007
Financial Instruments:
32 on or after 1 January 2010
Presentation
33 Earnings per Share on or after 1 January 2007
34 Interim Financial Reporting on or after 1 January 1999
36 Impairment of Assets on or after 1st January 2005
Provisions, Contingent
37 on or after 1 January 2007
Liabilities and Contingent Assets
38 Intangible Assets on or after 1 January 2005
Financial Instruments:
39 on or after 1 January 2010
Recognition and Measurement
40 Investment Property on or after 1 January 2007
41 Agriculture on or after 1 January 2007

Adoptation Status of International Financial Reporting Standards (IFRS) by ICAB

IFRS Title Effective Date on or after

IFRS 1 1 January 2009
First-time adoption of International financial

Page 21 of 55
 Reporting Standards
IFRS 2 Share-based Payment 1 January 2007
IFRS 3 Business Combinations 1 January 2010
IFRS 4 Insurance Contracts 1 January 2010
Non-current Assets Held for Sale and
IFRS 5 1 January 2007
Discontinued Operations
Exploration for and Evaluation of Mineral
IFRS 6 1 January 2007
Resources
IFRS 7 Financial Instruments: Disclosures 1 January 2010
IFRS 8 Operating Segments 1 January 2010
NA (Not yet adopted but under review
IFRS 9 Financial Instruments
process)
IFRS 10 Consolidated Financial Statements 1 January 2013
IFRS 11 Joint Arrangements 1 January 2013
IFRS 12 Disclosure of Interests in other Entities 1 January 2013
IFRS 13 Fair Value Measurement 1 January 2013

Chapter-03
Financial Reporting and Disclosure
1. Meaning of Full Disclosure

Full disclosure means that published financial statements and related notes should include
any economic information related to the accounting entity that is significant enough to affect
the decision of an informed and prudent user of financial statement.
Full disclosure aims at improving the clarity, quality, relevance and reliability of economic
data disclosed by the accounting entity. Full disclosure is important for the following reasons:
i. Under GAAP, alternative accounting procedures, such as depreciation methods,
inventory methods and methods of revenue recognition, are used under different
circumstances;
ii. Companies occasionally make changes in accounting or reporting procedures which
affect the comparability of financial statements (e.g., a company may change from
FIFO to LIFO in accounting for inventories).
iii. Full disclosure facilitates the functioning of an efficient capital market by providing
additional information about items included in basic financial statements.

2. Basic Questions in Disclosure

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 i. Who are the users of information, i.e., for whom is the information to be
disclosed?
Investors and creditors are the common users of accounting information in all the
countries, but other users are employees, customers, society, government etc.
ii. How much information should be disclosed?
All possible information relating to an entity cannot be disclosed in financial
statements. That would make financial statements unwieldy, large, costly and perhaps
more confusing. The information which is material (i.e., which is capable of affecting
judgment) to external decision makers, must be disclosed. Hendrickson says that,
the “Three concepts of disclosure generally proposed are”:
Adequate: Adequate disclosure means a minimum amount of disclosure so that the
financial statements are not misleading.
Fair: Fair disclosure would imply that the accounting and other information is
unbiased and impartial. The ethical objective requires that there is equal treatment
for all potential readers.
Full disclosure: The presentation of all relevant information.
iii. What should be disclosed?
What should be disclosed depends again, upon the basic objectives of financial
accounting and reporting. This is also related to the class of users. The following
information will be useful to all categories of users in all countries:
 Chairman's report
 CEO's/ Managing Directors report
 Letter to the Shareholders
 Narrative Text, Graphics and Photos, Listing of the company's directors and executive
officers
 Summary Financial Data
 Corporate Information
 Auditor's report on corporate governance
 Mission statement
 Corporate governance statement of compliance
 Statement of directors' responsibilities
 Invitation to the company's AGM

As well as financial statements including:

 Auditor's report on the financial statements

 Balance sheet
 Statement of retained earnings
 Income statement
 Cash flow statement
 Notes to the financial statements
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Besides the above, the laws of the land and professional pronouncement also require the
following information to be disclosed in many countries:

 Disclosure of accounting policies which includes consolidation of financial statement

if needed, fiscal year of the concern, cash and cash equivalents, methods of inventory
valuation, basis of fixed assets record, methods of depreciation, method of assets
valuation, pension and retirement benefit plan, income tax, foreign currency
translation, basis of estimates, revenue recognition principle etc.;
 Any changes of accounting policies;
 If certain assets are pledged as security to specific creditors, contingency liabilities
and unrealized gains.
 Disclosure of segment-wise accounting information (product-wise, and geographic
division-wise).
 Interim (quarterly) reports of the company’s performance and financial position;
 Supplementary information on accounting adjustments for changing in prices;
 Events occurring after the balance sheet date;
 Related party transactions;
 Future prospects of the company.

3. Some Special Items in Notes of Financial Statement

3.1 Related Party Transactions

IAS 24 Related Party Disclosure states that a party (an individual or an entity) is
related to another entity if it:
 Control, is controlled by, or is under common control with entity;
 Has significant influence over the entity;
 Has joint control over the entity;
 Is an associate of the entity;
 Is a joint venture of the entity;
 Is a number of the key management personnel of the entity or its parent etc.
Related party transactions could include:
 Purchase or sales of goods,
 Purchase or sales of non-current assets,
 Giving or receiving services,
 Leasing arrangements, e.g. allowing the use of an assets,
 Transfer of research and development etc.

Disclosure of Related Parties

A. Disclosure of control:

IAS 24 requires that relationships between parents and subsidiaries are disclosed
including the

Page 24 of 55
  Name of parent
 Name of ultimate controlling party (if different)
 Relationship whether or not any transactions have taken place between the
parties during the period

B. Disclosure of Transactions and Balances:

If there have been transactions between related parties; the reporting entity should
disclose:
 The nature of the related party relationship
 A description of the transactions
 The amounts of the transactions
 The amounts and details of any outstanding balances, etc.

3.2 Events after the Reporting Period (IAS-10)/ Events after the Balance
sheet Date/ Subsequent Events/ Post Balance sheet Events

Notes to financial statements should explain any significant financial events that took place
after the formal balance sheet date, but before it is finally issued. These events are referred to
as events after the balance sheet date or post balance sheet events or subsequent events.

Events after the

Financial statement Period Balance sheet
Date

Two types of events or transactions occurring after the balance sheet date may have a
material effect on the financial statements or may need to be considered to interpret this
statement accurately.
I. Events that provide additional evidence about conditions that existed at the balance
sheet date, affect the estimates used in preparing financial statements, and, therefore,
result in needed adjustments;
For example-

If a loss on account receivable results from a customer’s bankruptcy subsequent to the

balance sheet date, the financial statements are adjusted before their issuance.
II. Events that provide evidence about conditions that did not exist at the balance sheet date
but arise subsequent to that date and do not require adjustment of the financial statements.
For example-
Declaring stock dividend, Stock split, Cash dividend etc.
Many subsequent events or developments are not likely to require either adjustments of or
disclosure in the financial statements. Typically, these are non-accounting events or
conditions that managements normally communicate by other means.
For example-
 Product changes
 Management changes
 Unionization etc.

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4. Forms and Arrangements of Formal Statements

The balance sheet, the income statement and statement of cash flow are the formal financial
statements. The form and content of balance sheet and the income statement are prepared and
presented in the traditional manner in strict adherence to law.
1. Balance Sheet
2. Income statement
3. Statement of cash flow
(See details from L.S Porwal: Accounting Theory, Chapter-Disclosure in Financial
Reporting, Page-399)

5. Methods of Disclosure Additional Information in Financial Reporting

Additional information can be disclosed in many ways: by way of parentheses, footnotes,

supplementary statements and schedules, letter to share holders, directors report, auditors
report etc. We shall discuss them in briefly by the following way:

a. Notes to Financial Statements

Notes to financial statements can be in the form of i) parentheses, and ii) footnotes. In order
to keep the financial statements widely and meaningful, it is prudent to give additional
necessary explanation in parentheses or footnotes. Contingencies, pledges number of share
outstanding etc. should preferably be given in parentheses.

b. Others means of financial reporting

These include management discussion and analysis, and letters to shareholders. If the
management wants to take the shareholders directly into confidence, a personal letter is
addressed to every shareholder by a very senior executive, generally the president of the
company.

c. Directors report

It is a brief and to-the-point report. It highlights-

 The financial position
 Other information and
 Result of operation of the company during the year just ended.
d. Auditor’s report

The auditors report or certificate serves as a method of disclosure of the following types of
information:
 A material effect from using accounting methods different from those generally
accepted,
 A material effect from changing from the generally accepted accounting method to
another, and
 A difference of opinion between the auditor and the client regarding the acceptability
of one or more accounting methods used in the report.

e. Chairman’s Speech

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This is actually delivered in the shareholder’s annual general meeting. It highlights-
 The main policies of the company
 Changes, if any, made in the policies;
 Future plans; and
 The general economic condition of the industry and the economy of the country as a
whole;
 Others are routine.

f. Others source of information

These include-
 Analysts’ report
 Economic statistics
 News article and news paper report etc.

6. Internet Financial Reporting

Many companies are using the power and reach of the internet to improve of their financial
reporting practices and to provide more useful information to the financial statement readers.
Web sites contain links to their financial statements and other disclosures.
Internet financial reporting improves the overall usefulness of a company’s financial reports
by the following way:
a) Dissemination of reports via the web can allow firm to communicate with more users
than is possible with traditional paper reports;
b) Internet reporting allows users to take advantages of tools such as search engines and
hyperlinks to quickly find information about the firm and sometimes, to download the
information for analysis;
c) Internet reporting can help make financial reports more relevant by allowing
companies to report exchanged disaggregated data and more timely data than is
possible through paper based reporting.

At present internet financial reporting is a voluntary means of reporting. There are no

standards as to the completeness of reports on the internet, nor is there the requirement that
these reports be audited. One concern in this regard is that computer “hackers” could invade
a company’s web site and corrupt the financial information contained therein.
7. Benefits of Harmonization of Accounting and Reporting Practices

There are a number of reasons why the harmonization of accounting standards would be
beneficial. Businesses operate on a global scale and investors make investment decisions on a
worldwide basis. There is thus a need for financial information to be presented on a
consistent basis. The advantages are as follows:

1. Multi-national entities

Multi-national entities would benefit from closer harmonization for the following reasons.
a) Access to international finance would be easier as financial information is more
understandable if it is prepared on a consistent basis.

Page 27 of 55
 b) In a business that operates in several countries, the preparation of financial
information would be easier as it would all be prepared on the same basis.
c) There would be greater efficiency in accounting departments.
d) Consolidation of financial statements would be easier.

2. Investors

If investors wish to make decisions based on the worldwide availability of investments, then
better comparisons between entities are required. Harmonization assists this process, as
financial information would be consistent between different entities from different regions.

3. International Economic Groupings

International Economic groupings, e.g. the EU, could work more effectively if there were
international harmonization of accounting practices. Part of the function of international
economic groupings is to make cross-border trade easier.

Practical Problem:

1. For each of the following subsequent (post-balance-sheet) events, indicate whether a

company should (a) adjust the financial statements, (b) disclose in notes to the financial
statements, or (c) neither adjust nor disclose.
i) Introduction of a new product line; ii) Loss of assembly plant due to fire; iii) Sale of a
significant portion of the company’s assets; iv) Retirement of the company president; v)
Prolong employee strike; vi) Loss of a significant customer; vii) Issuance of a significant
number of share of company stock; viii) Material loss on a year-end receivable because of a
customer bankruptcy;

Solution:

Sl.
Particulars Comments
No.
1. Introduction of a new product line neither adjust nor
disclose
2. Loss of assembly plant due to fire disclose in notes to the
financial statements
3. Sale of a significant portion of the company’s assets disclose in notes to the
financial statements
4. Retirement of the company president neither adjust nor
disclose

Page 28 of 55
 5. Prolong employee strike disclose in notes to the
financial statements
6. Loss of a significant customer neither adjust nor
disclose
7. Issuance of a significant number of share of company disclose in notes to the
stock financial statements
8. Material loss on a year-end receivable because of a adjust the financial
customer bankruptcy statements

Practical Problem- 02:

At December 31,2013, Joni Brandt Corporation has assets of Tk. 10,000,000, liabilities of Tk.
6,000,000, common stock of Tk. 20,000,000 (reporting 2,000,000 shares of Tk. 10 per
common stock), and retained earnings of Tk. 2,000,000. Net sales for the year 2013 were
18,000,000, and net income was Tk. 8,00,000. As auditors of the company, you are making a
review of subsequent events on February 13, 2014, and you find the followings:

i. On February 3, 2014 one of Brandts customers declared bankruptcy. At December 31,

2013, this company owed Brandt Tk. 3,00,000, of which Tk. 40,000 was paid in
January, 2014;
ii. On January 23, 2014, a strike was called at one of Brandts largest plants, which halted
30% of its production. As of today (February 13) the strike has not been settled;
iii. On January 18, 2014, one of the three major plants of the clients burned.

Instructions:
State in each case how the 2014 financial statements would be affected if at all as per IAS-10.

Solution:
1. The financial statements should be adjusted for the expected loss pertaining to
the remaining receivable of Tk. 2,60,000. Such adjustments should reduce
accounts receivable to its realizable value as of December 31, 2014,
2. Strikes are considered general knowledge and therefore disclosure is not
required, many auditors, however, would encourage disclosure in all cases.
3. Report the fire loss in a footnote to the balance sheet and refer to it in
connection with income statement, since earnings power is presumably
affected.

Practical Problem- 03:

DEF PLC is in the process of issuing its financial statements for the year ended 30 June 2014.
In a meeting of Board of Directors held on 31 August 2014, the directors authorized the issue
of financial statements to shareholders.
Consider the impact (if any) of the following events after the reporting period on the financial
statements of DEF PLC for the year ended 30 June 2014 assuming they have not already been
accounted for:
a) In a meeting held on 10 July, the Board of Directors announced a final dividend of
Tk. 0.5 per share for the year ended 30 June 2014.
How should the final dividend be accounted for in the financial statements for
the year ended 30 June 2014?
Adjust

Page 29 of 55
 Disclose
Ignore
Correct Answer is DISCLOSE.
As the final dividend was declared after the year end, DEF PLC has no obligation to
pay dividends AT THE YEAR END which is why the dividend must not be recognized
in the current financial statements.
Declaration of dividends however is a significant event which must be disclosed in the
financial statements in accordance with IAS 10.

b) During the year, a customer had sued DEF PLC for damages that he claims to have
suffered as a direct result of the faulty goods supplied to him by DEF PLC.

At the year end, the litigation was in process and the Court had not reached a verdict.
The Company's legal advisors suggested that the chance of an adverse opinion against
DEF PLC was very low as the contract with the customer explicitly states that the
company shall not be liable to such claims. Consequently, no liability was recognized
in the financial statements and neither was the contingency disclosed.

On 28 August 2014, the court issued a verdict against DEF PLC and ordered the
payment of damages amounting Tk. 5 million to the claimant within 30 days.

The CFO is of the view that the financial statements need not be adjusted because the
obligation to pay damages to the customer arose after the year end upon the decision
of the court.
How should the liability for payment of damages be accounted for in the
financial statements for the year ended 30 June 2014?
Adjust
Disclose
Ignore
Correct Option is Adjust.
The decision of the Court against DEF PLC provides evidence of conditions
existing at the year end, i.e. the liability to pay damages to the customer existed
at 30 June 2014. The decision of the Court just confirmed this fact.
The argument of the CFO is not valid because the liability did not arise because
of the decision of the Court but the supply of faulty goods to the customer (i.e.
the obligating event) which had occurred before the year end.
c) DEF PLC suffered losses on their sales in the first week of July 2014 due to a
decrease in the prices of their products. The reduction in price was caused by falling
demand of the Company's products due to the unexpected launch of technologically
superior products by its competitor on 30 June 2014. The CFO is of the view that
because the sales were transacted after the year end, the associated loss should be
recognized in the next accounting period in line with the matching principle.
How should the decrease in inventory prices be accounted for in the financial
statements for the year ended 30 June 2014?
Adjust
Disclose
Ignore
Correct Option is Adjust.

Page 30 of 55
 The loss incurred after the year end is indicative of the conditions existing at the
yearend (i.e. the selling price of inventory had already decreased by the year
end).
Consequently, inventory cost shall be adjusted downwards in line with its Net
Realizable Value in accordance with IAS 2.
d) JFK PLC, a customer of DEF PLC, was declared bankrupt on 5 July 2014 due to its
deteriorating liquidity position after the withdrawal of financial support by its bank
since the past 3 months. DEF PLC was owed a material amount by JLK PLC as at 30
June 2014 which will not be recoverable.
How should bankruptcy of the customer be accounted for in the financial
statements for the year ended 30 June 2014?
Adjust
Disclose
Ignore
Correct Option is Adjust.
The loss of bad debt incurred so soon after the year end indicates that the trade
receivables were impaired at the year end. As a result, the receivables balance of
JFK PLC must be written off in the financial statements.
e) On 24 July 2014, a major earthquake disrupted the entire operations of DEF PLC. The
Company suffered great loss due to the damage caused to its factories and other
business premises. The Company's insurance policy does not cover the risk of loss
arising from natural disasters. The Company does not have sufficient internal funds or
the availability of external finance to rebuild the infrastructure necessary for it to
resume its business operations. Consequently, DEF PLC is unlikely to operate as a
going concern in the foreseeable future.
How will the change in going concern status of DEF PLC be reflected in its
financial statements for the year ended 30 June 2014?
Adjust
Disclose
Ignore
Correct Option is Adjust.
Even though going concern problems did not exist at the year end, the basis of
preparation of financial statements must be amended (e.g. using break-up value basis)
because IAS 10 specifically requires the preparation of financial statements on an
alternative basis if events after the reporting period indicate that the going
concern assumption is no longer appropriate.

Chapter- 04
Operating Segment (IFRS-8)
1. Definition of Segment reporting

Segment reporting is the practice of breaking down accounts in an annual report to detail
activity in particulars section of a business. In many countries, accounting rules mean this
must be done where a business can clearly identify sections of a certain size. The idea is to

Page 31 of 55
give investors a better insight into the way a company is being run and any potential problem
areas.

Most countries which have such rules do so under International Financial Reporting
Standards. These are rules and principles agreed by international bodies with the aim of
making it easier to compare the performance of companies in different countries. The rules
on segment reporting appear in IFRS statement number 8, first issued in 2006 and updated at
several points since.

2. Objectives of Segment Reporting

To enable the users of financial statements to:

 Better understand the performance of the enterprise;

 Better assess the risks and returns of the enterprise; and
 Make more informed (up-to-date) judgments about the enterprise as a whole.

3. Applicability of this standard

 Listed Companies
 Companies in the process of listing their equity or debt securities
 Banks including Co-operative banks
 Financial Institutions
 Insurance companies
 All commercial and business reporting enterprises having turnover exceeding Rs. 50
Crores.
 All commercial and business reporting enterprises having borrowings including
public deposits in excess of Rs. 10 Crore at any time during the accounting period.
 Holding and subsidiary companies of above.

4. Definition of Operating Segment

IFRS defines an operating segment as a component of an entity:

 That engages in business activities from which it may earn revenues and incur
expenses.
 Whose operating results are regularly reviewed by the entity’s chief operating
decision maker to make decisions about resources to be allocated to the segment and
asses its performance
 For which discrete (separated) financial information is available.

5. Definition of Reportable segments

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A business or geographical segment is a reportable segment only if:

 Its revenue from sales to external customers and from transactions with other
segments is 10% or more of the total revenue, external and internal, of all
segments; or
 Its segment result whether profit or loss is 10% or more of –
 The combined result of all segments in profit; or
 The combined result of all segments in loss,

Whichever is greater in absolute amount; or

Any segment may be treated as reportable segment by the management. If not designated as a
reportable segment, it should be included as an unallocated reconciling item.

 its segment assets are 10% or more of the total assets of all segments.

1. Revenue Test
2. Operating Profit (Loss) Test
3. Identifiable Assets Test

“All reportable segments are operating segments, but all operating segments are not
reportable.”- Explain.

6. Geographical Segment - Definition

‘Geographical segment’ is a distinguishable component of an enterprise:

 that is engaged in providing products or services within a particular economic

environment; and
 that is subject to risks and returns that are different from those of components
operating in other economic environments.

Factors for determination of geographical segment

 Similarity of economic and political conditions;

 Relationships between operations in different geographical areas;
 Proximity (nearness or similarity) of operations;
 Special risks associated with operations in a particular area
 Exchange control regulations
 The underlying currency risks.

7. Disclosing Segmental information

A. General Information:

Page 33 of 55
IFRS 8 requires disclosure of the following:

Factors for consideration of reportable segment

 Nature of products or services

 Nature of product processes
 Type or class of customers for the product or services
 Methods used to distribute the products or provide the services
 The nature of regulatory environment, for example, banking, insurance or public
utilities.

B. Information about Profit or Loss and Other Segment Items:

For each reportable segment an entity should report:

 A measure of profit or loss

 A measure of total assets
 A measure of total liabilities (if such an amount is regularly used in decision
making).

IFRS 8 does not define segment revenue, segment result (profit or loss) or segment assets.

 Therefore, the following amounts must be disclosed if they are included in

segment profit or loss:
 Revenues from external customers
 Revenues from inter-segment transactions
 Interest revenues
 Interest expense
 Depreciation and amortization
 Material items of income and expense (exceptional items)
 Interest in the profit or loss of associate and joint ventures accounted
for the equity method
 Income tax expense
 Material non-cash items other than depreciation or amortization.
 The following amounts must be disclosed if they are included in segment
assets:
 Investment in associates and joint ventures accounted for by the equity
method

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  Amounts of additions to non-current assets other than financial
instruments

C. Entity wide disclosures

IFRS 8 also requires the following disclosures about the entity as a whole, even if it only has
one reportable segment.

 The revenues from external customers for each product and service or each
group of similar products and services.
 Revenues from external customers split between the entity’s country of
domicile and all foreign countries in total.
 Non-current assets split between those located in the entity’s country of
domicile and all foreign countries in total.
 Revenue from single external customer which amounts to ten percent or move
an entity’s revenue. The identity of the customer does not need to be
disclosed.

D. Measurement

IFRS 8 requires segmental reports to be based on the information reported to and used by
management, even where this is prepared on a different basis from the rest of the financial
statements.

Therefore, an entity must provide explanations of the measurement of segment profit or loss,
segment assets and segment liabilities, including:

 The basis of accounting for any transactions between reportable segments

 The nature of differences between the measurement of segment profit or loss,
assets and liabilities and the amounts reported in the financial statements.
Differences could result from accounting policies and/or policies for the
allocation of common costs and jointly used assets to segments
 The nature of any changes from prior periods in measurement methods
 The nature and effect of any asymmetrical allocations to segments (for
example, where an entity allocates depreciation expense but not the related
non-current assets).

8. Segment Revenue

‘Segment revenue’ is the aggregate of

(i) the portion of enterprise revenue that is directly attributable to a segment.

(ii) the relevant portion of enterprise revenue that can be allocated on a reasonable
basis to a segment, and

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 (iii) revenue from transactions with other segments of the enterprise.

Exclusions from Segment revenue

(a) Extraordinary items.

(b) Interest or dividend income, including interest earned on advances or loans to other
segments unless the operations of the segment are primarily of a financial nature; and
(c) Gains on sales of investments or on extinguishment of debt unless the operations of
the segment are primarily of a financial nature.

9. Segment Expenses

‘Segment expense’ is the aggregate of

(a) the expense resulting from the operating activities of a segment that is directly
attributable to the segment, and

(b) the relevant portion of enterprise expense that can be allocated on a reasonable basis to
the segment including expense relating to transactions with other segments of the enterprise.

Segment Expense- Exclusions

 Extraordinary items
 Interest expense including interest incurred on advances or loans from other segments,
unless the operations of the segment are primarily of a financial nature;
 Losses on sales of investments or losses on extinguishment of debt unless the
operations of the segment are primarily or a financial nature;
 Income-tax expense
 General administrative expenses, head-office expenses, and other expenses that arise
at the enterprise level and relate to the enterprise as a whole.

10. Segment Assets

 Segment assets are those operating assets that are employed by a segment in its
operating activities and that either are directly attributable to the segment or can be
allocated to the segment on a reasonable basis.

If the segment result includes interest or dividend income, its segment assets should also
include the related receivables, loans, investments, or other interest or dividend generating
assets.

11. Segment Liabilities

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  Segment liabilities are those operating liabilities that result from the operating
activities of a segment and that either are directly attributable to the segment or can be
allocated to the segment on a reasonable basis.

If the segment result of a segment includes interest expense, its segment liabilities
include the related interest bearing liabilities. It does not include income-tax liabilities.

12. Problems areas in Segment Reporting

Segmental reports can provide useful information, but they also have important limitations.
 IFRS 8 states that segments should reflect the way in which the entity is
managed. This means that segments are defined by the directors. Arguably,
this provides too much flexibility. It also means that segmental information is
only useful for comparing the performance of the same entity over time, not
for comparing the performance of different entities.
 Common costs may be allocated to different segments on whatever basis the
directors believe is reasonable. This can lead to arbitrary (random) allocation
of these costs.
 A segment’s operating results can be distorted (unclear) by trading with other
segments on non-commercial terms.

Probem-1: (Segment Reporting)

Finlay Corporation is a diversified company that operates in different segments of the
followings:
Segment Revenue Profit Total Segment Revenue Profit Total
s Asset s Assets
s
A 800 100 550 F 60 15 72
B 450 70 400 G 30 18 45
C 70 30 80 H 40 21 45
D 100 70 112 I 90 45 60
E 80 20 178

Determine which of the segments are reportable based on the:

i. Revenue Test;
ii. Operating Profit (Loss) Test;
iii. Identifiable Assets Test.
Solution:
1. Revenue Test:
Total Revenue: (800+450+70+100+80+60+30+40+90) = 1,720;
10% of Total Revenue i.e.; 10% of 1720 = 172.
Hence segments A and B meet this test.
2. Operating Profit Test:
Total Operating Profit : (100+70+30+70+20+15+18+21+45) = 389;
10% 0f Total Profit i.e.; 10% of 389 = 38.9.
Hence segments A, B, D, and I meet this test.
3. Identifiable Assets Test:
Total Identifiable Assets: (550+400+80+112+178+72+45+45+60) = 1,542;

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10% 0f Total Identifiable Assets i.e.; 10% of 1542 = 154.2.
Hence segments A, B, and E meet this test.
So, Segments A, B, D, E, and I are reportable segments.

Problem-2 (Segment Reporting)

Identify the reportable segments from the following segments information:

Revenue Profit Total Revenue Profit Total
Assets Assets
A 800 100 550 F 60 15 72
B 450 70 400 G 30 18 45
C 70 30 80 H 40 21 45
D 100 70 112 I 90 45 60
E 80 20 178
Problem-3 (Segment Reporting)

Finlay Corporation is a diversified company that operates in five different industries: A, B, C,

D, & E. The following information relating to each segment is available for 2010:

Particulars A (Tk.) B (Tk.) C (Tk.) D (Tk.) E (Tk.)

Sales 40,000 80,000 5,80,000 35,000 55,000
Cost of Goods Sold 19,000 50,000 2,70,000 19,000 30,000
Operating Expenses 10,000 40,000 2,35,000 12,000 18,000
Total Expenses 29,000 90,000 5,05,000 31,000 48,000
Operating Profit (Loss) 11,000 (10,000) 75,000 4,000 7,000
Identifiable Assets 35,000 60,000 5,00,000 65,000 50,000

Sales of segment B & C included inter segment sales of Tk. 20,000 and 1, 00,000
respectively.
Instructions:
i. Determine which of the segments are reportable based on the:
1. Revenue Test;
2. Operating Profit (Loss) Test;
3. Identifiable Assets Test.
ii. Prepare necessary disclosure required by IFRS-08.
Solution:
i) Determination of Reportable Segments:
1. Revenue Test:
Total Revenue: (40,000+80,000+5, 80,000+35,000+55,000) = 7,90,000
10% 0f Total Revenue i.e.; 10% of 7,90,000 = 79,000.
Hence segments B and C both meet this test.

2. Operating Profit Test:

Total Operating Profit : (11,000+75,000+4,000+7,000) = 97,000;

10% 0f Total Profit i.e.; 10% of 97,000 = 9,700.
Hence segments A (11,000), B (10,000, absolute value), and C (75,000) all meet this test.
3. Identifiable Assets Test:

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Total Identifiable Assets: (35,000+60,000+5,00,000+65,000+50,000) = 7,10,000;
10% 0f Identifiable Assets i.e.; 10% of 7,10,000 = 71,000.
Hence only segment C meets this test.

Therefore, Segments A, B, and C are reportable segments.

ii)
Finlay Corporation
Segmental Worksheet

Particulars A B C Others Total

External Revenues 40,000 60,000 4,80,000 90,000 6,70,000
Intersegment Revenues 20,000 1,00,000 1,20,000
Total Revenues 40,000 80,000 5,80,000 90,000 7,90,000
Cost of Goods Sold 19,000 50,000 2,70,000 49,000 3,88,000
Operating Expenses 10,000 40,000 2,35,000 30,000 3,15,000
Total Expenses 29,000 90,000 5,05,000 79,000 7,03,000
Operating Profit (Loss) 11,000 (10,000) 75,000 11,000 87,000
Identifiable Assets 35,000 60,000 5,00,000 1,15,000 7,10,000

Reconciliation of Revenues:

Particulars Taka
Total Segmented revenues 7,90,000
Revenues from immaterial segments (90,000)
Eliminated of inter segmental Revenues (1,20,000)
Revenues for reportable segments 5,80,000

Reconciliation of Profit/ (Loss):

Particulars Taka
Total Segmented Operating Profit 87,000
Profits from immaterial segments (11,000)
Profits for reportable segments 76,000

Reconciliation of Identifiable assets:

Particulars Taka
Total Segmented Assets 7,10,000
Identifiable assets from immaterial segments (1,15,000)
Identifiable assets for reportable segments 5,95,000

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Problem-4 (Segment Reporting)

West Corporation reported the following consolidated data for 2012:

Sales Tk. 8,10,000

Consolidated income before tax 1,28,000
Total Assets 12,00,000

Data reported for West four operating divisions are as follows:

Division Division Division Division

A B C D
Sales to outsiders 2,80,000 1,30,000 3,40,000 60,000
Intersegment 60,000 18,000 12,000
sales
Traceable costs 2,45,000 90,000 2,90,000 82,000
Assets 4,00,000 1,05,000 5,00,000 75,000

Intersegment sales are priced at cost, and all goods have been subsequently sold to non
affiliates. Some joint production costs are allocated to the divisions based on total sales.
These joint costs were Tk. 45,000 in 2012. The company’s corporate center had Tk. 20,000 of
general corporate expenses and Tk. 1,20,000 of identifiable assets, which the chief operating
decision maker did not use in decision making regarding the operating segments.

Required:

i. Prepare a segment disclosure worksheet for the company as per IFRS-8.

ii. Prepare schedule showing which segments are reportable.

a) Segmental Reporting Worksheet:

Corporate
Particulars A B C D Total
Admin
Tk. Tk. Tk. Tk. Tk. Tk.
Revenues:
External Revenues 2,80,000 1,30,000 3,40,000 60,000 8,10,000
Inter segmental
Revenues 60,000 18,000 12,000 90,000
Total Revenues 3,40,000 1,30,000 3,58,000 72,000 9,00,000
Operating Costs:
Traceable Cost (245000) (90000) (290000) (82000) (7,07,000)
Allocated Cost *(17,000) (6,500) (17,900) (3,600) (45,000)
Segmented
Profit/(Loss) 78000 33500 50100 (13,600) 1,48,000

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Other Items:
General Corporate
Expenses (20,000) (20,000)
Income from
Continuing Operation 78,000 33,500 50,100 (13,600) (20,000) 1,28,000
Assets:
Segments 4,00,000 1,05,000 5,00,000 75,000 10,80,000
General Corporate
Assts 1,20,000 1,20,000
Total assets 4,00,000 1,05,000 5,00,000 75,000 1,20,000 12,00,000
*(3,40,000/9,00,000)x 45,000 = 17,000
A= (45000/900000) x 340000 = 17000
B = (45000/900000) x 130000 = 6500

b)
1. Revenue Test:
10% of Total Revenue = 10% of 9, 00,000 = 90,000
So, Segments A, B, and C meet this Test.
2. Operating profit Test:
10% of Total Profit = 10% of (78,000 + 33,500 + 50,100) 1, 61,600 = 16,160
So, segments A, B, and C meet this Test.
3. Identifiable Assets Test:
10% of Total Identifiable Assets = (10% of Tk. 10, 80,000) = 1, 08,000
So, segments A, and C meet this Test.

Schedule of 10% Quantitative Test Result

Name of Segments
Name of Test
A B C D
[Link] Test YES YES YES NO
[Link] profit Test YES YES YES NO
[Link] Assets Test YES NO YES NO

Therefore, Segments A, B, and C are reportable segments.

Problem-05
You are the CFO of Miaco Ltd. And you are asked for prepare a management information
system (MIS) report with the following data for the management for discussion making based
on IFRS-8.

Amount (Tk. Amount (Tk.

Particulars
in millions) in millions)
Sales:
Food products 5,650
Plastic & Packaging 625
Health & scientific 345
Others 162 6,782
Expenses:
Food products 3,335
Plastic & Packaging 425

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 Health & scientific 222
Others 200 4,182
Others:
General Expenses 562
Income from Investments 132
Interest Expenses 65
Identifiable Assets:
Food products 7,320
Plastic & Packaging 1,320
Health & scientific 1,050
Others 665 10,355

General Assets 722

Others Information:

i) Inter Segment Sales:

Food products Tk. 55 millions
Plastic & Packaging Tk. 72 millions
Health & scientific Tk. 21 millions
Others Tk. 7 millions
ii) Other operating profit includes Tk. 33 millions on intersegment sales;
iii) Information about intersegment expenses is not available.

Required:
Prepare a statement showing financial information about Miaco Ltd.’s operation in different
industry segments as per IFRS-8.

Problem-06:

Data with respect to four operating segments of Wabash Company for the period year ended
November 30, 2013, follows:

Operating Segments (Tk.)

Alpha Beta Gamma Delta
Net sales to outsiders 40,000 20,000 25,000 5,000
Intersegment transfer out 2,000 4,000 1,000 3,000
Intersegment transfer in 4,000 3,000 2,000 1,000
Other traceable expenses 9,000 6,000 5,000 10,000
Non traceable expenses total Tk. 20000
Wabash allocated non traceable expenses to operating segments by the following reasonable
method:

Alpha - 40%
Beta - 30%
Gamma - 20%
Delta - 10%
Alpha= (40000+2000) 42000-4000-9000-8000=21000
Beta = (20000+4000) 24000 – 3000-6000-6000 = 9000

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Gamma = (25000+1000) 26000 – 2000-5000-4000=15000
Delta= (5000+3000) 8000-1000-10000-2000 = (5000)
Instructions:
a) Prepare a working paper to compute the segment profit or loss for Wabash
Company’s four operating segments for the year ended November 30, 2013.
b) Identify the reportable segments.
Answer: 21000, 9000, 15000, (5000)

Problem: 07
Lioyd Corporation reports the following information for 2018 for its three operating
segments:
Segment A Segment B Segment C
Sales Tk. 15,00,000 Tk. 12,00,000 Tk. 3,00,000
Traceable operating expenses 10,00,000 7,00,000 3,00,000
Other 2018 expenses for Lioyd Corporation are as follows:
Indirect operating expenses Tk. 9,00,000
Interest expenses 1,20,000
General corporate expenses 2,00,000

Indirect operating expenses are allocated to segments based upon the ratio of each segment's
traceable operating expenses to total traceable operating expenses. Interest expense is
allocated to segments based upon the ratio of each segment's sales to total sales. Required:
i. Calculate the operating profit or loss for each of the segments for 2018.
ii. Determine which segments are reportable, applying the operating profit or loss test as
per IFRS-8.

Problem: 08

Calvin Inc. has operating segments in five different industries: apparel, building chemical,
furniture, and machinery. Data for the five segments for 2019 are as follows:
Apparel Building Chemical Furniture Machinery
(Figures in Taka)
Sales to non affiliates 8,70,000 7,50,000 55,000 95,000 1,80,000
Intersegments sales 5,000 15,000 1,40,000
Cost of goods sold 4,80,000 4,50,000 42,000 78,000 1,50,000
Selling expenses 1,60,000 40,000 10,000 20,000 30,000
Other traceable
expenses 40,000 30,000 6,000 12,000 18,000
Allocated general
corporate expenses 80,000 75,000 7,000 13,000 25,000
Other information:
Segment assets 6,10,000 5,60,000 80,000 90,000 1,40,000
Depreciation expense 60,000 50,000 10,000 11,000 25,000
Capital expenditure 20,000 30,000 15,000
Additional Information:

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 1. The corporate headquarters had general corporate expenses totaling Tk. 2,35,000. For
internal reporting purposes, Tk. 2,00,000 of these expenses were allocated to the
divisions based on their cost of goods sold. The other corporate expenses are not used
in segmental decision making by the chief operating decision maker.
2. The company had an inter corporate transfer pricing policy that all intersegment sales
shall be priced at cost. All intersegment sales were sold to outsiders by December 31,
2019.
3. Corporate headquarters had assets of Tk. 1, 25,000 that were not used in segmental
decision making by the chief operating decision maker.
4. The depreciation expenses (listed in the section titled, “Other information”) has
already been added into cost of goods sold in accordance with the company’s cost
measurement policies.
Instructions:
i. Prepare a Segment disclosure work paper for Calvin Inc.
ii. Prepare schedules to show which segments are separately reportable as per IFRS-8.
Chapter-05
Interim Reporting (IAS-34)
1. Definition of Interim Report
Any report that a publicly-traded company distributes to shareholders on a monthly,
quarterly, and semi-annual basis. The report contains information on the company's financial
state, such as operational income and net profit, for the period covered in the report. Unlike
annual reports, interim reports are not usually audited.
Difference between annual report and interim Report:
1. Audited 1. usually Unaudited
2. Complete report 2. Less complete
3. Compulsory 3. Not compulsory

APB Opinion No. 28 says it is an integral part of the annual report.

• As an integral part of the annual report
– Basically follow annual reporting procedures
May make some modifications to allow more frequent reporting
• Integral to the annual report
– Quarterly taxes are a portion of the annual taxes, probably use average
effective rate
• Separate reports
– Each quarter bears its own taxes, probably use marginal tax rate

2. Nature Interim Report

Interim financial reports provide more timely, but less complete, information than annual
financial reports.

3. Guidelines for Preparing Interim Statements

At a minimum (per IAS 34 0r APB Opinion No. 28), publicly traded companies should
report:

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1 a Sales or gross revenues
b Provision for income taxes
c Extraordinary items net of income taxes
d Cumulative-effect-type changes in accounting principles
e net income

2 Basic and diluted earnings per share

3 Seasonal revenue, costs, or expenses
4 Significant changes in estimates of income
tax expense
5 Disposal of a segment of a business and extraordinary and unusual items
6 Contingent items
7 Changes in accounting principles and estimates
8 Significant changes in financial position

Product Cost Modifications

• Use gross profit method to estimate inventory and cost of sales
• For FIFO inventories, may assume that liquidation of layers are temporary, with
replacement of layers before year end
• Lower of cost or market for inventories may consider expected year end outcomes
• Standard costing variances may be deferred if expected to be absorbed by year end

Other Expense Modifications

• Annual expenses may be allocated

• Advertising expenses may be deferred to later interim periods if clearly applies
– Only in the same fiscal year
• Income taxes from continuing operations
– Use an estimated effective annual tax rate
• Income taxes on unusual, infrequent and other items
– Calculate separately and include in the interim period containing that item

Segment Disclosures in Interim Reporting

 Revenue from external customers

 Inter segment revenues
 A measure of segment profit or loss
 Total assets for which there has been a material change since the last annual report
 A description of any differences in the basis of segmentation or measurement of
segment profit or loss since the last annual report
 A reconciliation between segment and total profits

SEC Interim Financial Disclosures

 Part I – Financial Information

 Item 1 – Consolidated Balance Sheet
 Consolidated Statement of Income
 Consolidated Statement of Cash Flows
 Notes to Consolidated Financial Statements
 Item 2 – Management’s Discussion of Financial Condition and Results of Operations.

Page 45 of 55
  Companies present comparative balance sheets as of the end of the current quarter and
at the prior year-end.
 Comparative income statements are presented for the current quarter and the same
quarter of the prior year plus the current year-to-date and the prior year-to-date.

Problems of Interim Reporting

Several inherent difficulties complicate interim reporting. Such as-

 The revenues of same companies fluctuate widely from one interim period to the
next because of seasonal factors, while in other companies heavy fixed costs
incurred in one interim period may benefit other interim periods.
 The cost and expenses related to a full year’s activities are incurred at regular
intervals during the year and need to be allocated to products in process or to other
interim periods to avoid distortion of interim financial results.
 Because of the limited time available to develop interim information, many cost
and expenses must be estimated for interim reports.

Problem -1 (Interim Reporting)

J.K. Corporation is a publicly traded company, is preparing the interim financial data which it
will issue to its shareholders and the SEC at the end of the 1 st quarter of the 2011-12 fiscal
year. J.K. Corporation’s financial accounting department has compiled the following
summarized revenue and expense data for the 1st quarter of the year:
Taka
Sales 60,000,000
Cost of Goods Sold 36,000,000
Variable Selling Expenses 2,000,000
Fixed Selling Expenses 3,000,000

Included in the fixed selling expense was the lum sum payment of Tk. 2,000,000 for
television and advertisement for the current year.
Instructions:
a) J.K. Corporation must issue its quarterly financial statements in accordance with
GAAP regarding interim reporting.
i. Explain whether J.K. Corporation should report its operating results for the
quarter as if quarter were a separate reporting period and of itself or as if the
quarter were an integral part of the annual reporting period.
ii. State how the sales, cost of goods sold, and fixed selling expenses would be
reflected in J.K. Corporation’s quarterly report prepared for the 1 st quarter of
the 2011-12 fiscal year. Briefly justify your presentation.
b) What financial information, as a minimum, must J.K. Corporation disclose to its
stockholders in its quarterly reports?

Solution: 1
a)
1. The company should report its quarterly results as if each interim period is an integral
part of the annual period.

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 2. The company’s revenue and expenses would be reported as follows on its quarterly
report prepared for the first quarter of the 2011–2012 fiscal year:
Sales revenue........................................................................Tk.60, 000,000
Cost of goods sold.......................................................................36,000,000
Variable selling expenses..............................................................2,000,000
Fixed selling expenses
Advertising (Tk.2, 000,000 ÷ 4)..............................................500,000
Other (Tk.3, 000,000 – Tk.2, 000,000)................................1,000,000
Sales revenue and cost of goods sold receive the same treatment as if this were an
annual report. Costs and expenses other than product costs should be charged to expense in
interim periods as incurred or allocated among interim periods. Consequently, the variable
selling expense and the portion of fixed selling expenses not related to the television
advertising should be reported in full. One-fourth of the television advertising is reported as
an expense in the first quarter, assuming TV advertising is constant throughout the year.
These costs can be deferred within the fiscal period if the benefits of the expenditure clearly
extend beyond the interim period in which the expenditure is made.
(b) The financial information to be disclosed to its stockholders in its quarterly reports as a
minimum includes:
1. Sales revenue or gross revenues, provision for income taxes, extraordinary items
and net income.
2. Basic and diluted earnings per share.
3. Seasonal revenue, costs or expenses.
4. Significant changes in estimates or provisions for income taxes.
5. Disposal of a component of a business and extraordinary, unusual, or infrequently
occurring items.
6. Contingent items.
7. Changes in accounting principles or estimates.
8. Significant changes in financial position.

Problem-2 (Interim Reporting)

Chris Inc. Has accumulated information for its second quarter income statement for 2012:

Sales Tk. 8,50,000

Cost of goods sold 4,20,000
Operating expenses 2,30,000
Additional Information:
1. First quarter income before taxes was Tk. 1,00,000, and the estimated effective annual
tax rate was 40%. At the end of the second quarter, expected annual income is Tk.
6,00,000, and a dividend exclusion of Tk. 30,000 and a business tax credit of Tk.
15,000 are anticipated. The combined state tax rate is 50%.
2. The Tk. 4,20,000 cost of goods sold is determined by the FIFO method and includes
7,500 units from the base layer at a cost of Tk.12 per unit. However, you have
determined that these units are expected to be replaced at a cost of Tk. 26 per unit.
3. The operating expenses of Tk. 2,30,000 include a Tk. 60,000 factory management
cost incurred in April. You have determined that the second quarter will receive about
25% of the benefits from these projects with the remainder benefiting the third and
fourth quarters.

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Required:
i. Calculate the expected annual effective tax rate at the end of the second quarter for
Chris Inc.
ii. Prepare an Income Statement for the second quarter of 2012.

Solution:

i) Calculation of effective Annual tax rate at the end of the second quarter:

Particulars Taka
Income from continuing operation 6,00,000
Less: Dividend exclusion (30,000)
Estimated annual taxable income 5,70,000
Combined tax rate 0.50
Estimated annual taxes before credit 2,85,000
Less: Business Tax credit (15,000)
Estimated income taxes for the year 2,70,000

2,70,000 x 100
Estimated effective annual tax = = 45%
6,00,000
ii)
Chris Inc.
Income Statement
For the months ended June 30, 2012

Particulars Taka
Sales 8,50,000
Less: Cost of goods sold (5,25,000)
Gross Profit 3,25,000
Operating expenses [(2,30,000 – 60,000)
+25% of Tk. 60,000, i.e.; 15,000] (1,85,000)
Income before taxes 1,40,000
Less: Income taxes 68,000
Net income after taxes 72,000
Workings:
1. Calculation of cost of goods sold:
Taka
Cost of goods sold given 4,20,000
Add: FIFO inventory liquidation
[7,500 x (26-12)] 1,05,000
Adjusted cost of goods sold 5,25,000

2. Calculation of income taxes:

Taka
Income before taxes for the 1st quarter 1,00,000
Income before taxes for the 2nd quarter 1,40,000
Total income before taxes up to 2nd quarter 2,40,000

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 Taka
nd
Total taxes payable up to 2 quarter
[2,40,000 x 45%] 1,08,000
Income taxes for the 1st quarter
[1,00,000 x 40%] 40,000
Income taxes for the 2nd quarter 68,000

Problem-3 (Interim Reporting)

Seagull Corporation is preparing its interim financial Statements for the third quarter of
Calendar 2016. The following trial balance is available for the third quarter:

Debit Credit
Accounts Title
(Tk.) (Tk.)
Cash 98,000
Accounts Receivable 2,85,000
Inventory 7,50,000
Fixed Assets 6,00,000
Accounts Payable 3,00,000
Common Stock 50,000
Retained Earnings 80,000
Sales 44,00,000
Administrative Expenses 3,12,000
Cost of Goods Sold 26,50,000
Loss on sale of Securities sold on July 30 75,000
Annual equipment overhaul costs paid on August 1 60,000
Totals 48,30,000 48,30,000

Additional Information:
At the end of the year, Seagull distributes annual employee bonuses and charitable donations
that are estimated at Tk. 50,000 and 6,000 respectively. The cost of goods sold includes the
liquidation of a 50,000 base layer in inventory that Seagull will restore in the third quarter at
a cost of Tk. 90,000. Effective corporate tax rate for 2016 is 32%.

Required: Prepare Seagull’s Interim Income Statement for the third quarter of Calendar
2016.

Solution:
Seagull Corporation
Interim Income Statement
For the Calendar Quarter Ended on Sept 30, 2016
Particulars Taka Taka
Sales Revenue 44,00,000
Less: Cost of Goods sold 26,90,000
Gross Profit 17,10,000
Less: Operating Expenses:
Selling and general administrative expense 3,12,000
Loss on securities 75,000
Bonus expense [50,000/4] 12,500

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 Charitable contribution expenses [6,000/4] 1,500
Miscellaneous (overhaul) expenses 15,000
[60,000/4]
Total operating expenses 4,16,000
Income before Taxes 12,94,000
Income tax expenses [12,94,000 X 32%] 4,14,000
Net Income after taxes 8,79,920

Workings:

1. Calculation of cost of goods sold:

Taka
Cost of goods sold (given) 26,50,000
Add: Inventory liquidation
[90,000 – 50,000] 40,000
Adjusted cost of goods sold 26,90,000

Problem: 4

Rail corporation is preparing its interim financial statements for the third quarter of calendar
2017. The following information was gathered for the third quarter:

1. Credit sales for the quarter Tk. 20,00,000

2. Cash sales for the quarter 5,00,000
3. Inventories, July 1 (FIFO cost method) 2,50,000
4. Cash purchases of inventory during the quarter 4,00,000
5. Inventory purchases made on account for the quarter 6,50,000
6. Estimated cost of goods sold ratio 45%
7. Selling and general administrative expenses paid 1,11,000
8. Effective corporate tax rate 28%
9. Loss on sale of securities sold on June 30, 2017 75,000
10. Annual insurance premiums paid on the August 1 84,000
(The anniversary date of the policy)
Additional information:
At the end of the year, Rail accrues its annual pension and depreciation expenses which
amount to Tk. 40,000 and Tk. 62,000, respectively.
Instruction:
Prepare Rail’s Interim Income Statement for the third quarter of Calendar 2017.

Rail Corporation
Interim Income Statement
For the Calendar Quarter Ended on September 30, 2016
Particulars Taka Taka
Sales Revenue:
Credit 20,00,000
Cash 5,00,000 25,00,000
Less: Cost of Goods sold (45%) 11,25,000
Gross Profit 13,75,000

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 Less: Operating Expenses:
Selling and general administrative expense 1,11,000
Insurance expenses [(84,000/12) x 2 14,000
Depreciation expense [62,000/4] 15,500
Estimated pension expenses [40,000/4] 10,000
Total operating expenses 1,50,500
Income before Taxes 12,24,500
Income tax expenses [12,24,500 X 28%] 3,42,860
Net Income after taxes 8,81,640

Workings:

1. Calculation of Cost of goods sold:

Taka
Sales 25,00,000
Ratio 45%
Cost of goods sold 11,25,000

Problem - 05

Curlew Corporation has several accounting issues with respect to its interim financial
statements for the 1st quarter of calendar 2020. For each of the independent situations given
below, state whether or not the method proposed by Curlew is acceptable. Justify each
answer with appropriate reasoning:
1. Curlew will not perform a physical inventory at the end of the calendar quarter. It
intends to estimate the cost of sales by using the gross profit inventory method.
2. Curlew grants volume discounts to its customers based upon their total annual
purchases. The discounts are calculated on a sliding scale ranging 1% to 8%. The
amount of discount applied will progressively increase for a customer as the
cumulative purchase total for the customer increases during the year. Curlew will use
the average rate of discounts earned for each customer in the prior year as expected
discount rate for the current year.
3. At the beginning of the current quarter, Curlew incurred a large loss on the sale of
some of its marketable securities. It intends to distribute the loss evenly to each of the
four calendar quarters.
4. Historically, Curlew incurs significant advertising costs during the 4 th quarter of the
calendar year, but has minimal advertising costs in the other interim quarters. It
intends to deduct 1/4th of the yearly estimated cost on its interim income statement.

Solution:

1. The use of gross profit method for estimating ending inventory and cost of sales is an
acceptable accounting procedure to use in the preparation of interim financial
statements. It is permitted under IAS 34.
2. The use of reasonable estimate based upon the experience of prior periods is an
acceptable accounting procedure for allocating annual expenses to interim periods. An
integral approach is permitted but not required under IAS 34.

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 3. Since the entire loss has been realized in the 1 st quarter, Curlew has no justifiable
basis for allocating the loss to the other quarters. It must show the entire loss in the 1 st
quarter. The discrete approach is required under IAS 34.
4. It is an acceptable accounting procedure to allocate some seasonal costs to other
accounting periods on a reasonable basis. An integral approach is permitted but not
required under IAS 34.

Problem - 06:

Stilt Corporation estimates its income by calendar quarter as follows for 2020:

2020
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
(Total)
Estimated
Tk. 30,000 Tk.40,000 Tk.40,000 Tk.50,000 Tk.1,60,000
Income

Income tax rates applicable to Stilt:

From: Tk. 0 to Tk. 50,000 15%

From: Tk. 50,001 to Tk. 75,000 25%
Over: Tk. 75,000 35%
Required:
Determine Stilt’s effective tax rate.

Solution:
Income tax on estimated Income:

First Quarter (Tk. 30,000 x 15%) 4,500

Second Quarter (Tk. 20,000 x 15%) + (Tk. 20,000 x 25%) 8,000
Third Quarter (Tk. 5,000 x 25%) + (Tk. 35,000 x 35%) 13,500
Fourth Quarter (Tk. 50,000 x 35%) 17,500
Total Estimated Taxes 43,500

Effective Tax Rate = [(Total estimated taxes/ Total estimated income) x 100]
= [(Tk. 43,500/1, 60,000) x 100] = 27.19%
Problem - 07:
Avocet Corporation is preparing its 1st quarterly interim report. It is subject to a corporate
income tax rate of 20% on the 1 st Tk. 50,000 of taxable income and 35% on taxable income
above Tk. 50,000. Its estimated pretax accounting income for 2020, by quarter, is:
2020
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
(Total)
Estimated
Tk. 75,000 Tk.1,65,000 Tk.1,43,000 Tk.1,20,000 Tk.5,03,000
Income

Avocet expects to earn and receive operating income for the year and does not contemplate
any changes in accounting procedures or principles that would affect its pretax accounting
income.

Required:

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 a) Determine Avocet’s estimated effective tax rate for 2020.
b) Prepare a schedule to show avocet’s estimated net income for each quarter of 2020.

Solution:
Requirement-(a)
Income tax on estimated Income:

First Quarter (Tk. 50,000 x 20%) + (Tk. 25,000 x 35%) 17,750

Second Quarter (Tk. 1, 65,000 x 35%) 57,750
Third Quarter (Tk. 1, 43,000 x 35%) 50,050
Fourth Quarter (Tk. 1,20,000 x 35%) 42,000
Total Estimated Taxes 1,68,550

Effective Tax Rate = [(Total estimated taxes/ Total estimated income) x 100]
= [(Tk. 1, 68,550/5, 03,000) x 100] = 33.51%

Requirement-(b)

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total (Tk.)
(2020)
Year-to-Date 75,000 2,40,000 3,83,000 5,03,000 5,03,000
Income
Quarterly Income 75,000 1,65,000 1,43,000 1,20,000
Income Tax (25,132) (55,290) (47,918) (40,211) (1,68,551)
(33.509%)
Estimated Net Income 49,868 1,09,710 95,082 79,789 3,34,449

75000 x 33.51% = 25132

165000 x 33.51% = 55290

Problem-8:
Iona Corporation is in the process of preparing its financial statements for the first quarter of
2009 and has asked your advice as to how to report several items. These items include the
following events which took place during the first quarter of 2009 (assume all amounts are
material):
1. Iona redeemed bonds with a carrying value of Tk.4,000,000 at a cost of Tk.3,760,000.
This early extinguishment occurred because Iona wants to issue new debt at lower
interest rates.
2. Iona uses the LIFO method for its inventories. On January 1, 2009, inventories
amounted to Tk.10,000,000, while, on March 31, 2009, inventories totaled
Tk.9,200,000. Iona expects to replace the liquidated inventory at the beginning of the
second quarter at a cost of Tk.1,000,000.
3. Iona changed its depreciation method on Tk.4,000,000 of its delivery trucks from the
declining balance method to the straight-line method. On January 1, 2009,
accumulated depreciation under the declining balance method was Tk.2,800,000. Had
the straight-line method been used, accumulated depreciation on January 1, 2009,
would have been Tk.2,300,000. The remaining life of the trucks is two years.
4. Iona pays its top executives a bonus at year-end of 6 percent of operating income
before bonus and income taxes. Operating income before bonus and income taxes for

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 the three months ended March 31, 2009, was Tk.10,000,000. Iona estimates that its
yearly operating income before bonus and income taxes will be Tk.60,000,000.
5. Iona closes its manufacturing operations in July of each year in order to make its
major annual repairs. Iona estimates that the cost of these repairs in 2009 will be
Tk.1,000,000. Required: For each of the events numbered 1 through 5, indicate how
that event should be reported on Iona's income statement for the three months ended
March 31, 2009, and the balance sheet accounts effects at March 31, 2009. Ignore
income taxes.
1) Iona should report a gain (non operating i.e., not extraordinary) from early
extinguishment of debt for Tk.240,000 on the income statement. On the balance sheet,
long-term debt will be reduced by Tk.4,000,000, retained earnings will increase by
Tk.240,000, and cash will be reduced by Tk.3,760,000.

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