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Unit 3 International Financial Reporting Level 4 City College


International financial reporting standards are required to be followed in order to produce fair financial statements. Present report deals with the preparation of income statement of Able Plc. for the particular year. Moreover, IAS standards such as IAS 2 related to inventories is explained by carrying out analysis of the cost of same. Furthermore, IAS 38 related to intangible assets are also accounted for in effective way. Thus, these standards are required for preparing correct fi

Question 1

Preparation of income statement for Able Plc.

Income statement for the year ended 31 December 2017






Less: COGS


Gross profit


Operating expenses


Rent and Rates


Salaries Outstanding


Bad Debts


Motor expenses


Warehouse Salaries


Hire of vehicles


Finance costs


Loss on closed branch


Depreciation on Non-current assets


Fixtures @ 10%


Motor Vans @ 10%


Directors Salary




Total operating expenses


Operating income


EBT (Loss)


Add: Depreciation


Tax paid


Net Loss




Workings for COGS (Cost of Goods Sold)


Beginning inventory




Ending inventory




Less: Return outwards




Less: Carriage Inwards





Workings for revenue




Less: Return Inwards


Revenue for period



Income statement is prepared for the year ended 31st 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, 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, 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, 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 organisation.

Question 3

Critical evaluation of the statement based on IAS 2

Inventory is an integral part of the organisation as without the same, production cannot be achieved by the company quite effectively. Manufacturing firm which has immense relying on the inventory is the main part of firm as without having adequate amount of stock in hand, customers' demand cannot be fulfilled. On the other hand, if inventory is purchased in more quantum, firm has to incur additional expenditures for handling of stock and it should be ordered in an adequate quantity only. Moreover, if it is not ordered in an optimum manner and less is purchased, then demand of production department cannot be accomplished in a better way. Thus, it is required to purchase inventory in that way which will increase production and as a result, customers may be provided with quality goods (Borio, James and Shin, 2014).

In relation to this, there is a standard provided by the IAS 2 which is purely dedicated to the inventory only. The main objective is to effectively make accounting treatment for shares. One of the problems in accounting for stocks is that amount of expense to be recognised as asset and which are carried forward till revenues from the same have been recognised. The IAS 2 provides evaluation of cost and recognition to be as expense and including write-down to net realisable amount quite easily. Moreover, cost formula is provided as well which is utilised for assign inventory's cost. The standard is applicable to the company when assets are held for sale in normal business operations entitled as finished items, assets held in production process for selling purpose entitled as work-in-process and raw materials consumed in manufacturing.           

On the other hand, IAS 2 prohibits certain types of inventories within above discussed scope (IAS 2 — Inventories. 2018). These are work-in-process from contracts in the field of construction which is governed by IAS 11. Financial instruments are not within the scope and is referred to IAS 39 standard relating to recognition and measurement and so, it do not apply to IAS 2. Moreover, biological assets which are related with accomplishment of agricultural activities and harvesting point are governed by IAS 41 dedicated to agriculture. On the other hand, measurement of inventory also do not apply when it is held by producers of items related to agriculture and mineral products to the extent and are measured at net realisable amount which is according to the practices adopted by company in industrial sector. Hence, when such changes are made in realisable value of inventory, changes can be recognised in profit and loss of particular period. On the other side, measurement of stock cannot be applied when the same is held by brokers and dealers measuring stock at fair value deducted to sales cost. The profit and loss is affected when inventories are measured in such way.

The main principle of IAS 2 is that inventories should be stated at lower of cost and net realisable value. In relation to this, Net Realisable Value (NRV) is termed as net amount that business expects to realise in normal operations by selling inventory. As per the stated standard of IAS 2, it is justified to state inventory at lower cost and NRV so that valuation can be made in the best possible manner. The measurement of inventories are cost of purchase, cost of conversion and other costs are accounted for. The cost of purchase includes purchase price, import duties and taxes as well. Moreover, it also includes transport, handling and related expenditures which are in direct relation and attributable to finished items, services and materials which are acquired. Moreover, rebates and discounts are deducted and costs are determined.

Cost of conversion is directly related to units attained in the production process of company and are direct labour. It includes properly allocating fixed and variable overheads incurred in conversion of raw materials into finished items. Fixed overheads are those which are required to be incurred irrespective of units being produced by company such as depreciation, maintaining factory's equipment, etc. On the other side, variable overheads are directly related to production and it varies directly with production volume. Allocating fixed overheads to conversion cost is based on normal capacity. On the other hand, it is measured at net realisable value and thus, cost of product is deducted in the best possible way. IAS 23 is related to borrowings cost which means that these costs can be included in cost of inventories meeting meaning of qualifying asset. Other than that, there are various costs which do not classify as inventory cost and should not be included.

Other costs are taken to the cost of inventories to the extent incurred on bringing stocks to adequate location. Example of not be included in cost of inventory are costs related to abnormal amount of materials wasted and labour costs. Storage expenses are also not accounted for. Administrative costs of overheads are also not included in the cost of inventories as these do not make any contribution for bringing stocks to present location and further, selling costs are also not taken into account (Vishny and Zingales, 2017). Another cost that should be excluded from cost of inventory is differences in foreign exchange which arise from the acquisition of stocks made in foreign currency quite effectually. Interest costs are also there when inventory is purchased by having terms of deferred settlement.

The standard cost and methods should be applied and so measurement of inventory can be made in an effective way. Moreover, stock items which cannot be changed, specific cost are attributable to particular item of stock in effective way. On the other hand, when items are classified as changeable, IAS 2 guides to use FIFO (First in First Out) method and related weighted average formulas to carry out cost of inventories quite easily. In relation to this, LIFO (Last in Last Out) method is not allowed as per the revised standard of IAS 2. The same formula should be applied by company and having same nature. Thus, cost of inventory can be calculated with much ease (Avdjiev, McCauley and Shin, 2016).

If inventories are of varied nature, then different formulas should be used to compute inventory's cost. On the other hand, expense recognition is also relevant to IAS 18 which states that revenue produced from sale of stocks. This is the reason when stock is sold-off and from the same, revenue is recognised. As a result, carrying amount realised from inventories is termed as Cost of Goods Sold which is an expenditure. Thus, write-down to net realisable value and losses to stocks are required to recognised as expenditure only when actually occur. Thus, it is justified that company should value inventory cost which is lower cost and net realisable value only for correct valuation.


Hereby, it can be concluded that organisation is required to follow international reporting standards in that which produces true and fair financial statements of firm. This is essentially required so that accounting rules and standards should be followed so that company may produce effective information in the form of financials. These are required in order to impart sufficient information to the external users by which they are able to take well-structured decisions. Hence, such standards produce quality information regarding financial performance of the firm.


  • Avdjiev, S., McCauley, R. N. and Shin, H.S., 2016. Breaking free of the triple coincidence in international finance. Economic Policy. 31(87). pp.409-451.
  • Borio, C. E., James, H. and Shin, H. S., 2014. The international monetary and financial system: a capital account historical perspective.
  • Davidson, G. and, 2015. Supported decision making: a review of the international literature. International journal of law and psychiatry. 38. pp.61-67.
  • Graham, A. and, 2017. Macroeconomic Determinants of International Financial Reporting Standards (IFRS) Adoption: Evidence from the Middle East North Africa (MENA) Region.
  • Graham, J. R. and, 2017. Tax rates and corporate decision-making. The Review of Financial Studies. 30(9). pp.3128-3175.
  • Kettunen, J., 2017. Interlingual translation of the International Financial Reporting Standards as institutional work. Accounting, Organizations and Society. 56. pp.38-54.
  • Maradona, A.F. and Chand, P., 2017. The Pathway of Transition to International Financial Reporting Standards (IFRS) in Developing Countries: Evidence from Indonesia. Journal of International Accounting, Auditing and Taxation.
  • Stent, W., Bradbury, M.E. and Hooks, J., 2017. Insights into accounting choice from the adoption timing of International Financial Reporting Standards. Accounting & Finance. 57(S1), pp.255-276.
  • Vishny, R. and Zingales, L., 2017. Corporate Finance. Journal of Political Economy. 125(6). pp.1805-1812.
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