IFRS Chapter 15 the Legal Versus the Commercial View of Accounting

8/10/2019 IFRS Chapter 15 the Legal Versus the Commercial View of Accounting

1/23

Chapter 15The legal versus the commercialview of accounting

www.xisu.edu.cn
http://www.xisu.edu.cn/http://www.xisu.edu.cn/


2/23

Contents

1. Off balance sheet finance

2. Substance over legal form

4. Common forms of off balance sheet

5. Revenue recognition

3. The IASB Framework


3/23

Accounting standards

IAS 11

IAS 17

IAS 18

IAS 24

IAS 32


4/23

Off balance sheet finance

What is off balance sheet finance?Off balance sheet financehas been

defined as the funding or refinancing of acompanys operations in such a way that,

under legal requirements and, untilrelatively recently, existing accountingconventions, some or all of the finance maynot be shown on its balance sheet.


5/23

Off balance sheet finance

Reasons as to why companies resort to off

balance sheet finance?To maintain low gearing;Without it gearing will be high, suggesting

that a right issue is imminent, with an adverse

effect on share price;Matching borrowings with assets being

developed and effectively removing both from thebalance sheet;

Activities such as leasing and financialservices can give rise to high gearing ratios andare therefore placed off balance sheet.


6/23

Diagram

The purpose

of off balancesheet finance

To stay with

the terms of

loan covenants

To keep

gearing

low

Off

balance

sheet

finance


7/23

Substance over form

What is substance over form?

The principal that transactions and otherevents are accounted for and presented inaccordance with their substance and

economic reality and not merely their legalform (Framework)

It is used to determine accounting treatment in financial statements

and so prevent off balance sheet balance. And the information

provided can better reflect the economic activities.


8/23

Substance over form

IAS17 Leases

In IAS17,there is an explicit requirement that ifthe lessor transfers substantially all the rewardsand risks of ownershipto the lessee then ,eventhough the legal title has not necessarilypassed ,the item being leased should be shown

as an assets in the statement of financial positionof the lessee and the amount due to the lessorshould be shown as liability

IAS24 Related party disclosures

It requires that financial statements to disclosefully any material transactions undertaken with arelated party by the reporting entity ,regardlessof any price charged.


9/23

IAS11Consruction contracts

It requires to account for attributable profitson

construction contracts under the accrualsconvention.

IAS27 Consolidated and separatefinancial statements

IAS27 contains a definition of a subsidiary based

on controlrather than just ownership rights,thussubstantially reducing the effectiveness of this

method of off balance sheet finance.

Substance over form


10/23

Controlis the power to govern the financial and operating policesofan entity so as to obtain benefit from its activities.

The control exists when:

(a) the parent has a majority of the voting rightsin thesubsidiary (possibly by agreementwith other members)

(b) the parent can appoint or remove a majority of theboard of the subsidiaryor

(c) the parent can direct the operating and financial policiesthrough a statute or agreement or

(d) the parent can cast the majority of votesat a boardmeeting of directors

Substance over form


11/23

The IASB Framework

The Framework provides the general

guidance for reporting the substance oftransactions and preventing off balancesheet finance.

You should consider these items while

studying :(a) IAS17 leases

(b) IAS32 Financial instruments

(c) IAS27 Consolidated and separatefinancial statements

(d) IAS24 Related party disclosures

(e) IAS18 Revenue


12/23

Common forms of off balance sheetfinance

Commonforms of

off balance

sheet

finance

Consignmentof inventory

Factoring ofreceivables

Sale andleaseback

agreements

Factoringof debts

Sale and

purchaseagreements


13/23


Consignment inventory

Consignment inventoryis an arrangement whereinventory is held by one party (says adistributor) but is owned by another party (forexample a manufacturer or a finance company).

The following apply where it is concluded that theinventory is in substance an assetof the dealer.

(a) The inventory should be recognized as such inthe dealers statement of financial position,corresponding liability to the manufacturer.

(b) Any deposit should be deducted from theliability and the excess classified as a tradepayable.


14/23


Sale and repurchase agreements

These are arrangements under which the

company sells an asset to another person onterms that allow the company to repurchase theassetin certain circumstances.

If the seller has the right to the benefits of theuse of the asset,and the purchase terms aresuch that the purchase is likely to take place,the

transactionshould be accounted for as a loan.


15/23

Sale and leaseback transactions

A sale and leaseback transaction involves the sale

of the an asset and the leasing backof the sameasset. The lease payment and the sale price areusually negotiated as a package.

The accounting treatment depends on the typesof lease involved.

If it is a financial lease, then it is in substance aloan from the lessor to the lessee.

If it is operating leaseand the transaction hasbeen conducted at fair value ,then it can beregarded as normal sale transaction.


16/23

Factoring of receivables /debts

Where debts or receivables are factored, the

original creditor sells the debts to the factor. Thesale price may be fixed at the outset or may beadjusted later.

If the seller has to pay intereston the differencebetween the amounts advanced to him and theamounts that the factor has received ,and if theseller bears the risks of non-paymentsby thedebtor , then the indications would be that thetransaction is, in effect, a loan.



17/23

Revenue recognition

Introduction

Accrual accounting is based on the matching ofcosts with the revenue they generate.Revenue is generally recognized asearned atthe point of sale, because at that point fourcriteria will generally have been met:

(a) The product or service has been provided to theseller

(b) The buyer has recognized his liabilityto pay forthe goods or service provided

(c) The buyer has indicated his willingness to hand

over cash or other assetsin settlement of hisliability.

(d) The monetary valueof the goods or services hasbeen established.


18/23

Revenue recognition

Revenue from specific typesof transaction or events

IAS 18

Sale of

goodsRendering

of services

Interests ,royalties

and dividends


19/23

Revenue recognition

Sale of goods

Revenue from the sale of the goods should only be

recognized when all the following are satisfied:

(a) The entity has transferred the significant risks andrewardsof ownership of the goods to the buyer

(b) The entity has no continuing managerial involvementtothe degree usually associated with ownership ,and nolonger has effective control over the goods sold

(c) The amount of revenue can be measured reliably

dIt is probable that the economic benefitsassociated

with transaction will flow to the entity(f) The costs incurredin respect of transaction can bemeasured reliably


20/23

Revenue recognition

Rendering of services

The associated revenue should be recognized by reference

to the stage of completion of the transactionat the end ofthe reporting period. The outcome of a transaction can beestimated reliably when all the following are satisfied.

(a) The amount of revenue can be measured reliably

(b) It is probable that the economic benefitsassociated withtransaction at the end of the reporting period can bemeasured reliably

(c) The stage of completionof the transaction at the end of

reporting period can be measured reliably(d) The costs incurredfor the transaction and the costs tocomplete the transaction can be measured reliably


21/23

Revenue recognition

Interest , royalty and dividends

The revenue is recognized on the following bases

aInterestis recognized on a time proportionbasis that take into account the effective yield onthe asset

(b)Royaltiesare recognized on an accrual basis inaccordance with the substance of relevantagreement

(c) Dividendsare recognized when the shareholders right to receive payment established


22/23

Disclosure

The following items should be disclosed.

(a) The accounting policesadopted for the recognition ofrevenue, including the methods used t determine thestage of completion of transactions involving therendering of services

(b) The amount of each significant categoryof revenuerecognized during the period including revenue arising

from:(i) The sale of goods

(ii) The rendering of service

(iii) Interest

(iv) Royalties

(v) Dividends(c) The amount of revenue arising from exchange ofgoods or servicesincluded in each significant category ofrevenue


23/23

www.xisu.edu.cn
http://www.xisu.edu.cn/http://www.xisu.edu.cn/

Date post:	02-Jun-2018
Category:	Documents
Upload:	samuel-kpakpo-grippman
View:	226 times
Download:	0 times

IFRS Chapter 15 the Legal Versus the Commercial View of Accounting

Documents