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International Financial reporting is usually known as IFRS and these standards are issued by IFRS foundation and IASB which is International accounting standards board. It makes easy for company and organizations by giving common language which is globally understood for business affairs. The main motive of IFRS is that company accounts are being understandable and comparable across the international and national boundaries. The present report is all about IFRS and its application. The income statement on the basis of IFRS standard has been drawn with some specific adjustments. In the next part there is critical understanding of international accounting standards as per the module APC311. Accounting for intangible assets on the specific area of capitalizing development and research costs has been explained in this report with the proper application based example. Further, reports also depicts current key issues present in international financial reporting and the conceptual framework for accounting. As per the IAS 2 inventories should be valued at lower cost and net realisable value has been justified in this.

Q1 Prepare Income statement of Able Plc for the year 2017 and explain International Financial Reporting Standards

International Financial Reporting standards can be referred as a set of accounting standards which are developed by not for profit and independent organisations. The main objective of IFRS is to give a basic global framework that how organisations should prepare financial statements and disclose them. It gives guidance or directions about preparing financial statements instead of setting rules for specific industry reporting. International standards plays vital role in big companies, multinational companies who have their subsidiaries in different countries. If single set of worldwide standards will be adopted then it will simplify the procedures of accounting by giving permission to a company for using throughout one reporting language. And this single standard will give cohesive views of funds to investors and auditors. The financial performance of an organization is been represented as statement of comprehensive income whose sub parts can be statement of profit and loss and statement of comprehensive income. It includes the elements as per IFRS standard such as revenue and expenses. While the accounting period where inflows and enhancements of assets raise the economic benefit. Equity is been raised if liabilities are decreased. Contributions made by equity are not included in revenues such as partners, shareholders and owners. In the accounting period in the outflow s or the depletions of assets decreases the economic benefit and more liabilities gives the result of equity decrement. Distributions are not been included in the equity participants. Some circumstances related to comprehensive income can be: Number of assets and liabilities are remeasured. The financial asset's fair value may increase or decrease which can be modified as available for sale. Revaluation of intangible assets, property, plant may increase or decrease.

There is the requirement of faithful and fair representations for the effects of transactions and all other events and the conditions which are according with recognised criteria for liabilities, assets, income and expenses which are set in the framework. IFRS has generally forbidden offsetting. As the standards require offsetting whenever some specific conditions are satisfied. It requires the entity for comparative information in context of preceding year for all amount which is mentioned in current year's financial statements. This comparative information also provides descriptive and narrative information which is related to financial statements of current year. The additional statement of financial position which is also known as balance sheet of International accounting standard 1 when any organisation applies for accounting policy or if it again classifies item of the financial statements. If the important changes in the nature of organisation's operations or the preview of financial statements, that classifies more appropriately with regard for choosing and selecting application of accounting policies.

Income statement of the year ending 31 December 2017



Amount (in £)




Sales return






Cost of sales



Beginning Inventory






Purchase return



Adjusted purchase



Goods available for sale



Closing inventory



Cost of sales



Gross Margin



Operating Expenses



Carriage inwards



Motor Expenses



Warehouse salaries



less outstanding salaries






Hire of vehicles



Director salary









Motor vans



Finance costs



Rent and rates






Operating Expenses






General Expenses



Tax paid



Bad debts






Total expenses






Net Income




Interpretation- Financial performance of a company can be measured with the help of income statement. The non-operating section of income statement consists of revenues and benefits from non-primary business activities. The last line of income statement is referred as income statement which is calculated by subtracting expenses from revenue. First step is calculating margin with the help of revenue and cost of goods sold during the year which includes inventory, purchase and sales. 397000 is the gross margin which is equivalent for low turnover with high gross margin in context of return on investment. Operating expenses include all the expenses which are related to factory or office like carriage inward, salaries and wages, etc. which are of 79000 and some general expenses like tax, interest are of 24000 so in this series total expenses are of 103000 and net income has been calculated from gross margin and total expenses as 294000. As a recommendation if company should reduce its expenses then it will be gaining great advantage on the perspective of net income approach.

Q2. Evaluating accounting for intangible assets as per the International Accounting Standards

Valuation for tangible asset is very easy as compared to intangible assets. It is very complex and different side in nature. In many cases, justified amount is required for the subjective judgement. Any of the industries or company do not have fixed or standard fixed fee structure for the valuation of intangibles. Valuation usually depends on client’s size, complexity and expertise which is basic requirement for the outcome of project which has been expected. While estimating fees for intangible valuation, major importance has been given to overall scope of the project's valuation. Expertise knowledge is essentially required and even experts should be available. As per accounting standards, intangible assets reflect positive impact on audit fees for big banks because risk measurement is very important for cost of auditing due to risk litigation which is against the auditor.

For compensating risk, auditor can also include margin in the fees of audit if he estimates the value incorrectly of intangibles. Any individual or entity may face the risks which are involved while estimating the value of intangibles. The unique characteristic of intangible assets refers that there will be event in which some difficulties are considered in determining the value of intangibles are faced by evaluators. Uncertainty and difficulty will be in the following areas which are as follows: Identification of all intangible assets, usually this involves all the hurdles while separating intangible assets or to identify the benefits which are cause by the intangibles assets. For example if Delia has a strong brand name which has formed unique product, and profit attribute of company is from the brand name of intangible asset. So in this scenario, this unique product has given the strong brand name to the company so there is a need for considering prospects of the product at the time of valuation.

IAS 38 helps in determining the valuation method for intangibles. If on intangible asset is being valued by different valuation method then it will create many discrepancies and different results. In this respect, IAS 38 gives the guidance that either select cost model or the revaluation model. As if the values will be once verified by auditor than it may reduce risk related to unjustified valuations. Comparison with same intangible assets can be used for sense check but it is also difficult to find similar intangible assets for comparison. Some key parameters should be identified for using calculations of valuation method. Whenever the discounted cash flow method, cash flows, discount rate or time length which should be discounted might be very far from objective for identification. Estimation will be subjective if cash flows are uncertain. The rate of inflation and economic condition of the country will give dependency to the value of each and every cash flow. As this will be increasing the complexity for identifying intangible asset's fair value. Discount rate will also be affected by the rate of inflation. This is not a single thing which affects the discount rate, risk free interest rate and premium also influenced by inflation but major impact will be on discount rate along with valuation.

According to International Accounting Standard 38, lifetime of intangible asset should be similar to time length for discounting cash flow and IAS 38 has also given method or way to measure the lifetime. If the discounted present value will be less for the further cash flow then it will have less impact on the intangible asset's value. If valuation has been performed regularly then there is risk in fluctuation of the value of intangible assets but some of them requires regular valuations of some intangible assets. For example: brand name of a multinational company like Apple and Google might raise because of new and creative product's launch and vice versa due to bad news like failed in some project of net worth 40 million. Evaluation is required for intangible assets in every quarter or every half year. Investors and shareholders may not have complete information for the best decision making.The major risk related to intangible asset's price is overestimated and even write off might be required. This situation usually happens when market conditions are changes or because of too optimistic estimate of previous year.

International accounting standard 38 sets the criteria for measurement of intangible assets and even disclosures are being required (Horton, J, Serafeim, and Serafeim, 2013). It is a non monetary asset which can be identifiable without physical substance. The assets which can be separable, sold, licensed, transferred etc. intangible assets can be computer software, patents, copyright, goodwill, licences and import quotas. Goodwill is in scope of IAS 38 but it is not considered as identifiable resource. Any expenditure related to intangible asset will be considered as an expense if the definition has been met of an intangible asset, future economic benefit can be with asset and cost can be measured reliably. It is difficult to differ maintaining cost or enhancing the operation of entity or goodwill. Because of these reason brands which are generated internally, titles has been published, customer lists and alike items are not replicated as intangible assets.  The cost of internally generated intangible assets can be classified as into development phase or research phase(Ganysa, 2017). Expenditure on research has been considered as expense and expenditure on development which is able to meet specified criteria is replicated as cost to an intangible asset. These are measured primarily at any cost and the company measures the cost less accumulated amortisation of intangible asset. It also measures the fair value of asset and fair value can be recognised by reference to active market. Any intangible asset whose life is finite and is amortised and I context of impairment testing(Ahmed, Neel and Wang, 2013). Asset which does not amortised has indefinite useful life but for impairment it is tested annually and if any intangible asset has been disposed then profit, loss is considered as gain or loss on disposal.

For example –A research and development project was developed as a new production process by Jack and Jones Ltd on 1 January 2016. The last phase of research was on 30 April 2016 and a cost of 500 was incurred. On 1 May 2016 development phase was started which incurred total expenditure of 2000 up to 31 December 2016 and 1500 was on 1 December 2016 and rest occurred between 1 December 2016 and 31 December 2016. The director of jack and Jones ltd mentioned that on 1 December there production process met criteria for intangible asset. In 2017, more expenditure incurred of 4000 and project was over successfully. In the year end the amount to be recovered with new production process is been estimated of 3800. Explain accounting for Year ended 31 December 2016.

31 December 2016, 500 was research expense up to 30 April 2016 and 1500 as Development expenditure from 1 may 2016 to 1 December 2016 and it will be mentioned as expense in profit and loss statement. If the capitalization criteria is been met on 1 December 2016 the development cost of 500 from 1 December 2016 to 31 December 2016 will be capitalize on the basis of intangible asset as per the year ended 31 December 2016.


So from the above discussion, there will be possibilities where many difficulties will be considered for determining intangible's value which are faced by the evaluators is a most different characteristic of intangible assets. IAS 38 gives proper clarification about valuation methods for intangibles. If any intangible is valued by other method then there will be many discrepancies and unique results as IAS 38 provides proper guidance for selecting cost or revaluation model so lifetime of asset should be similar to discounting cash flows time length.

Q3 Inventories should be valued at “Lower of cost and net realisable value”? Explain?

As per IAS 2 inventories should be valued as lower of cost and net realizable value. IAS 2 gives direction to identify cost of the inventories and the recognition of the cost which can be referred as expense. The cost formulas which are used for assigning costs to all inventories. Inventories are measure at the lower of cost and net realisable value(Oliveira, Rodrigues and Craig, 2010). Cost formulas refers to cost of inventories of items that cannot be ordinarily exchangeable and the services and goods which are produced and differentiated for some specific projects shall be allocated by referring specific identification of their individual costs. This identification of cost signifies particular cost which has been attributed items of the inventory which is identified. For example, the operating segment uses the specific inventories can be also used by different operating segment of the entity. So difference in location of inventories are not sufficient for proper justification of uses of the different cost formula. If the inventories are damaged then there cost may not be recoverable whether they have become partially or wholly obsolete even the selling prices also declined. If the estimated costs of completion and incurred cost for increasing sales (Kieso, Weygandt and Warfield, 2010.) . For reducing inventories  below the cost to net realisable value is as accurate with view that in excess amount assets should not be carried.

Inventories are usually reduced from the net realisable value. In some cases it might be appropriate to related or similar items. If inventories related to similar use, product line, purpose  are traded or marketed in same geographical area which cannot be evaluated in different ways practically. On the basis of classification of inventories they cannot be write off for example, in a particular operating segment's inventories and finished goods. Net realisable value are the most reliable indication which is available when the estimates are prepared and fluctuations of price or cost which is directly related to events who occurs after end of the period so that events give confirmation for the conditions which exists at the end period. It also considers the purpose for the inventory which is help. For example, the inventory's net realisable value for satisfying the firm service or sales contract which is purely based on price of contract. If the inventory quantities which are held more than sales contract then net realisable value which is excess is based on selling prices. The cost of inventories usually includes all cost of conversion like direct labour and production overhead, cost of purchase and other cost which has been occurred for bringing all inventories to present condition and location. So the cost of inventories are assigned by – FIFO, First in first out or (WACC) weighted average cost of capital formula for all interchangeable items and specific identification of the items in inventory which are not exchangeable. The carrying amount has been considered of inventories whenever the inventories are sold n the expense where related revenue is recognised.

The international accounting standard is refers to the accounting treatment of the inventories. It determines the cost of inventory and the related expenses, It should be determine in cost formulas which is used to assign cost of inventory. In IAS2 measurement of inventories are included cost of purchase net of trade discounts received, cost of conversion and other costs which is bringing the inventories to their present location. The fundamental principle of IAS 2 is inventories are required to stated that lower of cost and net realisable value.  Inventory cost should not to include abnormal waste, storage costs and selling costs, Interest cost when inventories directly arising on the recent acquisition of inventories invoiced in foreign currency

Net realizable value is the net amount of that product or entity which expect to sell in the market. It is an estimated selling price in the business. To estimates the net realizable value are based on the most reliable entity available at the time where estimates are made of the amount the inventory are expected to realize. When an item of inventory is carried at net realizable value because its selling price has declined, this inventory is still on market in a subsequent period and its selling price has increased. When the expected ultimate cost of the assets exceeds its net realizable value, so the expected cost is low in accordance with the requirements of other standards. Cost of inventory not be recoverable if the inventory is damaged. For example net realizable value of the quantity of inventory held which is to satisfy the firm sales is abed on the contract price. If those inventories quantities which is held the sales contracts are for those is less than.


In order to ascertaining the required level of inventories in the organization IAS 2 will act as a funneling component which in turn will be effective and adequate as to analyses the costs of inventories. It will be based on analyzing the holding costs with consideration EOQ measurements and the reorder level of firm's inventories. Therefore, the main motive is to engaged the business on the going purpose which will be assistive in terms of improving the efficiency of the business. Thus, such information will help the accounting professionals in terms of analyzing the costs of holding inventories as well as manufacturing expenses. The effective and accurate decision will make changes in the business policies. Similarly, the impacts of such guidance will result in effective business efficiency and growth for the longer period. In addition, it presents the guidance and framework to analyses the various costs such as cost of purchase, conversion as well as fixed and variable costs. Thus, the main motive of implicating such techniques into business operations is that it will be helpful in managing the abnormal wastes, storage costs, selling costs, overhead expenses on selling and administration etc. However, such control and execution will help in improving the revenue generation of the business as well as proper control over the costs of businesses.


From the above report it can be concluded that international financial reporting standards are mandatory for all the organizations and especially the organisation who are operating internationally. The objective of IFRS has been accomplished that company accounts are being understandable and comparable across the international and national boundaries. Without IFRS financial position of the company is not known. In this report the issues related to financial reporting are cleared. Financial information leads to both pros and cons, whether the pros are affecting market very positively. Decision making is becoming easy for investors and shareholders because of single set standard. According to IFRS standards income statement has been provided with the adjustments. It can be summarized from the report that Able Plc should focus on reducing expenses for gaining more profit and growth. As per IAS 2 Inventories should be valued at “Lower of cost and net realisable value”, this statement has been explained with the reference.


  • Kieso, D. E., Weygandt, J. J. and Warfield, T. D., 2010. Intermediate accounting: IFRS edition (Vol. 2). John Wiley & Sons.
  • Ahmed, A. S., Neel, M. and Wang, D., 2013. Does mandatory adoption of IFRS improve accounting quality? Preliminary evidence. Contemporary Accounting Research. 30(4). pp.1344-1372.
  • Horton, J., Serafeim, G. and Serafeim, I., 2013. Does mandatory IFRS adoption improve the information environment?. Contemporary accounting research. 30(1). pp.388-423.
  • Christensen, H. B., Hail, L. and Leuz, C., 2013. Mandatory IFRS reporting and changes in enforcement. Journal of Accounting and Economics. 56(2-3).  pp.147-177.
  • De George, E. T., Ferguson, C. B. and Spear, N. A., 2012. How much does IFRS cost? IFRS adoption and audit fees. The Accounting Review, 88(2). pp. 429-462.
  • Hamberg, M., Paananen, M. and Novak, J., 2011. The adoption of IFRS 3: The effects of managerial discretion and stock market reactions. European Accounting Review.  20(2).  pp.263-288.
  • Cascino, S. and Gassen, J., 2015. What drives the comparability effect of mandatory IFRS adoption?. Review of Accounting Studies. 20(1). pp.242-282.
  • Andrić, M., Mijić, K. and Jakšić, D., 2011. Financial reporting and characteristics of impairment of assets in the republic of Serbia, according to IAS/IFRS and national regulation. Economic Annals. 56(189).  pp.101-116.
  • Ganysa, D. D., 2017. The Influences Of Company Size, Audit Quality, Audit Tenure, And Audit Pricing To The Going Concern Audit Opinion (Gcao) (Bachelor's thesis, Jakarta: Fakultas Ekonomi Dan Bisnis UIN Syarif Hidayatullah.).
  • Oliveira, L., Rodrigues, L.L. and Craig, R., 2010. Intangible assets and value relevance: Evidence from the Portuguese stock exchange. The British Accounting Review. 42(4). pp.241-252.

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