Unit 3 International Financial Reporting Level 4 City College

Question 1

Preparation of income statement for Able Plc.

Workings

Income statement is prepared for the year ended 31^st December 2017 for the organisation.  It is being prepared with the help of financial reporting standards provided by IFRS (International Financial Reporting Standards) which provides an effective way to prepare financials in the best possible manner. The income statement is prepared for Able Plc and transactions are extracted from the trial balance from the books of accounts. Trial balance is a useful statement which is prepared from transactions imparted by journal entries and then ledger accounts are formulated quite effectually. It is effectively prepared by using information from trial balance with much ease. In relation to this, statement of Profit and Loss is formulated in an effectual way.

Moreover, expenditures incurred and incomes earned are taken into account and thus, income statement is prepared showing the highlights of expenses and gains made during past financial year in the best possible way. It can be said that such statement is required which provides clarity to organisation whether it has incurred more of expenditures in relation to the income garnered in past year (Stent, Bradbury and Hooks, 2017). Thus, income should be more than expenses so that financial performance of organisation may be enhanced in a better way. It can be interpreted from the income statement of Able Plc which shows that firm is not able to earn profits in the period. Loss has been incurred for the period amounting to -1000. 

In relation to this, revenue attained in financial year was 195000 which can be further bifurcated into sales accomplished amounting to 205000 and return inwards have been deducted from the same to effectively get amount of revenue which is equal to 195000. On the other hand, COGS amounts to 122000 which has been attained by applying formula of calculating COGS. The formula is Beginning inventory + Purchases – Closing stock and thus, it can be referred to working notes that figure arrived is 124000. From this, return outwards are deducted such as 1000 and further, carriage inwards are reduced amounting to 1000. Thus, net amount is of COGS which comes to 122000.

On the other hand, by deducting sales revenue from cost of sales, gross profit of 73000 is attained which is good for Able Plc and it shows that organisation is able to initiate control upon expenses and as a result, gross income is positive implying earning capability of firm in an effective way. Moreover, operating expenditures such as Rent and Rates, salaries outstanding and bad debts are allowed. Moreover, motor expenses, warehouse salaries, hire of vehicles and finance costs are applied. On the other side, loss incurred on closed branch of organisation is applied amounting to 20000. Depreciation is provided on non-currents assets at the rate of 10 % and so, total of 3000 is deducted. Directors Salary amounting to 10000 and insurance expense of 1000 is also accounted for. By applying such operational expenditures, total amount equals 74000. It clearly shows that expenses have exceeded income earned for the year and as a result, loss is incurred. Thus, it is required that Able Plc should effectively initiate control upon expenses so that necessary ones can be reduced up to a high extent and net income can be garnered from the business operations in the best possible manner. Hence, profits will exceed expenditures in the future course of action.

Question 2

Critical evaluation of the statement of financial reporting

The financial reporting standards help accountants to effectively carry out proper statements of organisation's position in an effectual manner (Maradona and Chand, 2017). These standards are required to be followed so that accurate financial statements may be extracted easily. It can be said that accounting standards when effectively complied with the provisions of professional body provides true and fair view of the financial health of firm quite effectually. There are various financials such as cash flow statement, balance sheet, statement of changes of equity and income statement are prepared with highlighting the performance of firm in a particular year. This information is quite useful for the external stakeholders like suppliers, investors, creditors and other users that rely on financials and thus, they are able to take decisions in an effective manner.

In relation to this, statement provided is accounting for intangible assets in specific area of capitalising research and development costs. While addressing this statement, IAS 38 can be applied to classify intangible assets and accounting treatment can be easily made. The accounting professional body IAS (International Accounting Standards) 38 is dedicated to the regulation of treatment of intangible assets in the best possible manner. This is required so that accounting can be applied effectually. The intangible assets are termed as those assets which cannot be physically touched. IAS para 8 states that these are identified as non-monetary assets having no physical substance. On the other hand, fixed assets such as machinery, furniture and fixtures as well as related items can be touched physically. However, in the statement, research and development costs are provided which are reported as intangible assets as they are incurred on formulating any research and as a result, they are regarded as intangible ones (Graham and et.al, 2017).

In relation to this, goodwill has been excluded by IAS 38 because it is non-identifiable and so, it is not included as per the standards. The main reason behind exclusion of goodwill is that future economic benefits are realised from assets are not capable for being identified and thus, exclusion is required for effective accounting treatment of intangible assets. On the other hand, when intangible assets are identified, next step is to recognise and measure the same with much ease. In relation to this, main objective of IAS 38 is that only those assets can be classified as intangible assets which meet with the specific criteria imparted by the body. The standard also provides the way to recognise and measure value of various intangible assets in the best possible way. The intangible assets are identifiable when it is separable governed by IAS 38.12. It further clarifies assets being capable of sold, transferred and rented as well as exchanged which are useful in carrying out accounting treatment. Moreover, they are identifiable when any contractual rights arise on the behalf of entity.

Intangible assets can be effectively acquired by purchasing separately, part of combination of business, government grant, internal generation and exchanging assets quite effectually (Kettunen, 2017). In relation to this, recognition is required to meet the criteria effectually. IAS 38.21 requires that organisation should recognise intangible assets be it is purchased or internally generated at cost only and applies to if it is probable that economic benefits will be realised in the future course of action. Moreover, these future benefits are attributable to assets and would flow towards entity. Another is that asset cost can be measured quite reliably. This requirement is applied whether intangible assets is acquired externally or internally produced in the best possible manner. In relation to this, IAS 38 includes provision of extra recognition for internally generated assets. Moreover, future economic benefits should be based on reasonable ground that benefits will flow towards organisation and thus, firm will be benefited. The probable condition based on such benefits is considered as satisfied for those assets which are acquired internally or through business combination.

On the other hand, if the said recognition criteria of a particular intangible asset is not met then IAS 38 has different opinions regarding the same (IAS 38 — Intangible Assets. 2018). It states that when criteria has not been met, expenses on particular asset should be recognised as expenditure only when it is actually incurred by organisation. Furthermore, business combination has a pre-assumption regarding an intangible asset. It is that fair value of particular asset can be acquired through business combination and as a result, it can be effectively measured on reliable basis. As per IAS 38.35, if an asset whose expenditure incurred cannot be classified as per the meaning of intangible assets and recognition criteria, then the same should be treated as a part of goodwill amount that is attributed to it based on its date of acquisition in the best possible manner. Reinstatement is also termed which means that IAS has prohibited organisation which subsequently indulges in reinstating as intangible asset usually at the future date implying an expenditure being charged to an expense on original basis.

Research and development costs are initially expenses which are incurred by company in initiating research of new things and that can be included in its product portfolio quite effectually. It can be said that these expenditures are accounted for so that organisation may be able to provide goods and services to the customers to earn profits with much ease. This enhances overall satisfaction of customers quite effectually and thus, income generated is helpful for company to survive in the future course of action. Research is required so that new insights can be extracted and business may provide better quality of goods to consumers with beating rivals in the same industry (Davidson and et.al, 2015). Thus, organisation produces profits that help to attain future operational tasks and activities with much ease and as a result, recognition of such costs are necessarily required by company to effectively comply with the standards of professional body.

As per IAS 38.54, it is required that all costs incurred on research and development costs should be charged to expenses. This clearly shows that organisation is required to charge cost to expenses for initial recognition of the same quite easily. Furthermore, IAS 38.57 states that all the costs related to development are required to be capitalised when technical feasibility and commercial viability have been effectively established for the sale or use of an intangible asset. In simple words, statement clarifies that business should state the use and provide clarity regarding main intent to use such assets in an effective manner. Moreover, organisation should also state that whether economic benefits will be realised in the future through usage of such assets in the best possible way. Moreover, if business cannot differentiate research phase from development one, then it should be treated as expense of research phase only.

In relation to this, research and development are recognised initially, then organisation measures asset at cost less accumulated amortisation. There are mainly two types of models which are applied to such asset after initially recognising the same quite effectually. They are cost and revaluation model. The basic model usually applied by organisation is cost model which means that intangible assets must be carried towards the cost less accumulated impairment losses and amortisation if any (Graham and et.al, 2017). On the other side, revaluation model states that assets should be carried at revalued figure less accumulated amortisation and impairment losses only when fair value may be assessed from the active market. Thus, it can be said that firm is able to carry out research and development costs which are effectively capitalised and forms the part of intangible assets of org

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