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 Retained earnings
 Comprehensive Income Statement or Income Statement
 Cash Flow Statement

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  Notes to the Financial Statements
 Accounting Policies

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.

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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.

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.

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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
 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 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.

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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.

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.

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 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”

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.

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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

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

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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

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.

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.

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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.

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.

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 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.

The AICPA represents the profession nationally in dealing with rule-making, standard-setting
and legislative bodies, public interest groups, state CPA societies, and other professional
organizations. The AICPA’s proactive communications program is designed to inform
regulators, legislators, the public, and others of the varied roles and functions of CPAs in
society.

The AICPA develops standards for auditing and other services by CPAs, provides
educational guidance materials to its members, develops and grades the Uniform CPA
Examination, and monitors and enforces compliance with the profession’s technical and
ethical standards.

The AICPA’s founding in 1887 established accountancy as a profession distinguished by

rigorous educational requirements, high professional standards, a strict code of professional
ethics, a licensing status, and a commitment to serving the public interest.

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.

Mission
The AICPA's mission is to provide members with the resources, information and leadership
that enable them to provide valuable services in the highest professional manner to benefit the
public, employers and clients. In fulfilling its mission, the AICPA works with state CPA
organizations and gives priority to those areas where public reliance on CPA skills is most
significant.

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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.

Public relations program

The AICPA runs a number of public relations activities that include: having members
available to the media to provide technical support in the areas of CPA practice expertise;
operating an extensive high school and college student recruitment program called "Start
Here, Go Places." to encourage students to consider a CPA career; and getting the word out
about the vital role that CPAs play in the U.S. economy in support of financial markets, small
business and entrepreneurship.

Government relations program

The AICPA has a Washington office and a political action committee. Many of its
Washington activities have a public interest aspect. The AICPA and its members make
recommendations to Congress and a number of federal agencies to help them better serve the
public, in areas of CPA technical expertise, such as taxation and accounting. In these areas,
the AICPA tries to solely be a technical resource rather than recommending policy positions.
For example, in the social security debate, the AICPA develops white papers that lay out all
of the options and the pros and cons of each option to assist policy makers. A careful process
is used to weed out any policy bias in such analyses. The Washington office also represents
the profession in matters of specific interest to members.

The AICPA's Political Action Committee is a contributor to U.S. Congressional

representatives and Senators from both parties who sit on various legislative committees of
relevance to CPAs.

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External roles
CPAs are licensed by individual states, so they must follow the laws and regulations of the
state they are licensed in. Once achieving state CPA licensure, by federal regulation, CPAs
are automatically licensed to practice before the Internal Revenue Service, with essentially
the same rights and duties as attorneys. For audits involving federal monies, the Government
Accountability Office has issued additional standards commonly referred to as the Yellow
Book.

In addition, the AICPA is a primary source for defining Generally Accepted Accounting
Principles for State and Local Governments through the issuance of an Industry Audit Guide
and Statements of Position.

The AICPA is a leading member of the International Federation of Accountants and the
Global Accounting Alliance.

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]

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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:

 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

The FASB's structure is very different from its predecessors in many ways. The board
consists of five full-time members. [2] These members are required to sever all ties to previous
firms and institutions that they may have served prior to joining the FASB. This is to ensure
the impartiality and independence of the FASB. All members are selected by the FAF. They
are appointed for a five year term and are eligible for one additional five year term.[1] The
current members are (with current term end dates indicated)[1]:

 Robert H. Herz, Chairman (2012)

 Thomas J. Linsmeier (2011)
 Leslie F. Seidman (2011)
 Marc A. Siegel (2013)
 Lawrence W. Smith (2012)

In additional to the full-time members, there are approximately 68 staff members. These staff
are, "professionals drawn from public accounting, industry, academe, and government, plus
support personnel.

In 1984, the FASB formed the Emerging Issues Task Force (EITF).[1] This group was formed
in order to provide timely responses to financial issues as they emerged. This group includes
15 people from both the private and public sectors coupled with representatives from the
FASB and an SEC observer.[2] As issues emerge, the task force considers them and tries to
reach a consensus on what course of action to take. If that consensus can be reached, they
issue an EITF Issue and FASB doesn't get involved. An EITF Issue is considered just as valid
as a FASB pronouncement and is included in the GAAP.

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

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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
 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

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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 (the new name for International Accounting Standards issued after
2001), and promoting the use and application of these standards.

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).

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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)

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.

Structure of IFRS
IFRS are considered a "principles based" set of standards in that they establish broad rules as
well as dictating specific treatments.

International Financial Reporting Standards comprise:

 International Financial Reporting Standards (IFRS)—standards issued after 2001

 International Accounting Standards (IAS)—standards issued before 2001

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  Interpretations originated from the International Financial Reporting Interpretations
Committee (IFRIC)—issued after 2001
 Standing Interpretations Committee (SIC)—issued before 2001
 Framework for the Preparation and Presentation of Financial Statements (1989)

IAS 8 Par. 11

"In making the judgement described in paragraph 10, management shall refer to, and
consider the applicability of, the following sources in descending order:

(a) the requirements and guidance in Standards and Interpretations dealing with similar and
related issues; and

(b) the definitions, recognition criteria and measurement concepts for assets, liabilities,
income and expenses in the Framework."

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 standatd.
 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.

IASB current projects

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

17 | P a g e
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 longterm.

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.[9] Companies are also expected to
benefit, as investors will be more willing to provide financing.[9] 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.[9]

For a current overview see IAS PLUS's list of all countries that have adopted IFRS.

List of IFRS statements with full text link

The following IFRS statements are currently issued:

 IFRS 1 First time Adoption of International Financial Reporting Standards

 IFRS 2 Share-based Payment
 IFRS 3 Business Combinations
 IFRS 4 Insurance Contracts
 IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
 IFRS 6 Exploration for and Evaluation of Mineral Resources
 IFRS 7 Financial Instruments: Disclosures
 IFRS 8 Operating Segments
 IFRS 9 Financial Instruments
 IFRS 10 Consolidated Financial Statements
 IFRS 11 Joint Arrangements
 IFRS 12 Disclosure of Interests in Other Entities
 IFRS 13 Fair Value Measurement

List of International Accounting Standards

 IAS 1- Presentation of Financial Statements
 IAS 2- Inventories
 IAS 3- Consolidated Financial Statements Originally issued 1976, effective 1 Jan 1977.
Superseded in 1989 by IAS 27 and IAS 28.

18 | P a g e
  IAS 4 - Depreciation Accounting Withdrawn in 1999, replaced by IAS 16, 22, and 38, all
of which were issued or revised in 1998.
 IAS 5 - Information to Be Disclosed in Financial Statements Originally issued October
1976, effective 1 January 1997. Superseded by IAS 1 in 1997.
 IAS 6- Accounting Responses to Changing PricesSuperseded by IAS 15, which was
withdrawn December 2003
 IAS 7 - Statement of Cash Flow
 IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors
 IAS 9 - Accounting for Research and Development Activities Superseded by IAS 38
effective 1.7.99
 IAS 10- Events After the Reporting Period
 IAS 11 - Construction Contracts
 IAS 12- Income Taxes
 IAS 13- Presentation of Current Assets and Current Liabilities Superseded by IAS 1.
 IAS 14- Segment Reporting
 IAS 15- Information Reflecting the Effects of Changing Prices Withdrawn December
2003
 IAS 16- Property, Plant and Equipment
 IAS 17- Leases
 IAS 18- Revenue
 IAS 19- Employee Benefits
 IAS 20- Accounting for Government Grants and Disclosure of Government Assistance
 IAS 21 - The Effects of Changes in Foreign Exchange Rates
 IAS 22- Business Combinations Superseded by IFRS 3 effective 31 March 2004.
 IAS 23- Borrowing Costs
 IAS 24- Related Party Disclosures
 IAS 25- Accounting for Investments Superseded by IAS 39 and IAS 40 effective 2001.
 IAS 26- Accounting and Reporting by Retirement Benefit Plans
 IAS 27- Consolidated and Separate Financial Statements
 IAS 28- Investments in Associates
 IAS 29- Financial Reporting in Hyperinflationary Economies
 IAS 30- Disclosures in the Financial Statements of Banks and Similar Financial
Institutions Superseded by IFRS 7 effective 2007.
 IAS 31- Interests In Joint Ventures
 IAS 32- Financial Instruments: Presentation Disclosure provisions superseded by IFRS
7 effective 2007.
 IAS 33- Earnings Per Share
 IAS 34- Interim Financial Reporting
 IAS 35- Discontinuing Operations Superseded by IFRS 5 effective 2005.
 IAS 36- Impairment of Assets
 IAS 37- Provisions, Contingent Liabilities and Contingent Assets
 IAS 38 - Intangible Assets
 IAS 39 - Financial Instruments: Recognition and Measurement
 IAS 40- Investment Property
 IAS 41 – Agriculture

IFRS List
Courses can be taught on any of the following standards:

 IFRS 1: First-time Adoption of International Financial Reporting Standards

 IFRS 2: Share-based Payment
 IFRS 3: Business Combinations

19 | P a g e
  IFRS 4: Insurance Contracts
 IFRS 5: Non-current Assets Held for Sale and Discontinued Operations
 IFRS 6: Exploration for and Evaluation of Mineral Resources
 IFRS 7: Financial Instruments: Disclosures
 IFRS 8: Operating Segments
 IAS 1: Presentation of Financial Statements.
 IAS 2: Inventories
 IAS 7: Cash Flow Statements
 IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors
 IAS 10: Events After the Balance Sheet Date
 IAS 11: Construction Contracts
 IAS 12: Income Taxes
 IAS 16: Property, Plant and Equipment (summary)
 IAS 17: Leases
 IAS 18: Revenue
 IAS 19: Employee Benefits
 IAS 20: Accounting for Government Grants and Disclosure of Government Assistance
 IAS 21: The Effects of Changes in Foreign Exchange Rates
 IAS 23: Borrowing Costs
 IAS 24: Related Party Disclosures
 IAS 26: Accounting and Reporting by Retirement Benefit Plans
 IAS 27: Consolidated Financial Statements
 IAS 28: Investments in Associates
 IAS 29: Financial Reporting in Hyperinflationary Economies
 IAS 31: Interests in Joint Ventures
 IAS 32: Financial Instruments: Presentation
 IAS 33: Earnings per Share
 IAS 34: Interim Financial Reporting
 IAS 36: Impairment of Assets
 IAS 37: Provisions, Contingent Liabilities and Contingent Assets
 IAS 38: Intangible Assets
 IAS 39: Financial Instruments: Recognition and Measurement
 IAS 40: Investment Property
 IAS 41: Agriculture

Current Status of Bangladesh Accounting Standards( BASs ) vis-à-vis IASs/IFRSs

BAS
BAS Title Remarks
No. BAS Effective Date

Adopted, on or after 1st January

1 Presentation of Financial Statements
2007

Adopted, on or after 1st January

2 Inventories
2007

Adopted, on or after 1st January

7 Statement of Cash Flows
1999

20 | P a g e
 Accounting Policies, Changes in Adopted, on or after 1st January
8
Accounting Estimates and Errors 2007

Adopted, on or after 1st January

10 Events after the Balance Sheet Date
2007

Adopted, on or after 1st January

11 Construction Contracts
1999

Adopted, on or after 1st January

12 Income Taxes
1999

Adopted, on or after 1st January

16 Property, Plant & Equipment
2007

Adopted, on or after 1st January

17 Leases
2007

Adopted, on or after 1st January

18 Revenue
2007

Adopted, on or after 1st January

19 Employee Benefits
2004

Accounting of Government Grants

Adopted, on or after 1st January
20 and Disclosure of Government
1999
Assistance

The Effects of Changes in Foreign Adopted, on or after 1st January

21
Exchange Rates 2007

Adopted, on or after 1st January

23 Borrowing Costs
2010

Adopted, on or after 1st January

24 Related Party Disclosures
2007

Accounting and Reporting by Adopted, on or after 1st January

26
Retirement Benefit Plans 2007

Consolidated and Separate Financial Adopted, on or after 1st January

27
Statements 2010

Adopted, on or after 1st January

28 Investments in Associates
2007

Not yet adopted by ICAB as

Financial Reporting in
29 Impracticable for Bangladeshi
Hyperinflationary Economics
context

Adopted, on or after 1st January

31 Interest in Joint Ventures
2007

Adopted, on or after 1st January

32 Financial Instruments: Presentation
2010

21 | P a g e
 Adopted, on or after 1st January
33 Earnings per Share
2007

Adopted, on or after 1st January

34 Interim Financial Reporting
1999

Adopted, on or after 1st January

36 Impairment of Assets
2005

Provisions, Contingent Liabilities and Adopted, on or after 1st January

37
Contingent Assets 2007

Adopted, on or after 1st January

38 Intangible Assets
2005

Financial Instruments: Recognition Adopted, on or after 1st January

39
and Measurement 2010

Adopted, on or after 1st January

40 Investment Property
2007

Adopted, on or after 1st January

41 Agriculture
2007

IFRS Title Adoption Status of ICAB

First-time adoption of International financial Adopted as BFRS 1, effective on or after 1
IFRS 1
Reporting Standards January 2009
Adopted as BFRS 2, effective on or after 1
IFRS 2 Share-based Payment
January 2007
Adopted as BFRS 3, effective on or after 1
IFRS 3 Business Combinations
January 2010
Adopted as BFRS 4, effective on or after 1
IFRS 4 Insurance Contracts
January 2010
Non-current Assets Held for Sale and Discontinued Adopted as BFRS 5, effective on or after 1
IFRS 5
Operations January 2007
Adopted as BFRS 6, effective on or after 1
IFRS 6 Exploration for and Evaluation of Mineral Resources
January 2007

Adopted as BFRS 7, effective on or after 1

IFRS 7 Financial Instruments: Disclosures
January 2010

Adopted as BFRS 8, effective on or after 1

IFRS 8 Operating Segments
January 2010
IFRS 9 Financial Instruments Not yet adopted by ICAB

22 | P a g e
 Chapter-04
Segment Reporting

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
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 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 financial information is available.

5. Definition of Reportable segments

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.

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 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:

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
 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
(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

 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 allocation of these
costs.
 A segment’s operating results can be distorted 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 Segments Revenue Profit Total
s 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

Determine which of the segments are reportable based on the:

i. Revenue Test;
ii. Operating Profit (Loss) Test;
iii. Identifiable Assets Test.

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 FASB no. 131.

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.

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
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 are not available.

Required:
Prepare a statement showing financial information about Miaco Ltd.’s operation in different
industry segments as per IFRS-8.
 Chapter-05
Interim Reporting
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.

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 of 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 35 0r APB Opinion No. 28), publicly traded companies should
report:

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 LIFO 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.

 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 1st 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

The lump sum payment of Tk. 2,000,000 for television and advertisement expense was
included in the fixed selling expense 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 1st
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?

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 LIFO 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.
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.

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.