kc-01 corporate financial reporting
TRANSCRIPT
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C A S R I L A N K A C U R R I C U L U M 2 0 1 5
S T U D Y T E X T
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ii
First edition 2015
ISBN 9781 4727 1050 5
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the
British Library
Published by
BPP Learning Media Ltd
BPP House, Aldine Place
142–144 Uxbridge Road
London W12 8AA
www.bpp.com/learningmedia
The copyright in this publication is owned by
BPP Learning Media Ltd.
All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system or transmitted in
any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the priorwritten permission of the copyright holder.
The contents of this book are intended as a guide and not
professional advice and every effort has been made to
ensure that the contents of this book are correct at the time
of going to press by CA Sri Lanka, BPP Learning Media, the
Editor and the Author.
Every effort has been made to contact the copyright holders
of any material reproduced within this publication. If any
have been inadvertently overlooked, CA Sri Lanka and BPP
Learning Media will be pleased to make the appropriate
credits in any subsequent reprints or editions.
We are grateful to CA Sri Lanka for permission to reproducethe Learning Outcomes and past examination questions, the
copyright of which is owned by CA Sri Lanka, and to the
Association of Chartered Certified Accountants and
Chartered Institute of Management Accountants for use of
past examination questions in which they hold the
copyright.
©
BPP Learning Media Ltd
2015
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Introduction iii
Contents
Page
Introduction iv
Chapter features vi
Learning outcomes vii
Action verbs checklist xiii
KC1 Corporate Financial Reporting
1 The Regulatory and Conceptual Framework 1
2 Non-financial reporting 39
3 Presentation of financial statements 71
4 Non-current assets 101
5 Intangible assets 135
6 Impairment of assets 155
7 Leases 181
8 Other standards related to assets 209
9 Provisions and Events after the reporting period 241
10 Revenue 267
11 Income taxes 297
12 Financial Instruments 33113 Employee Benefits 389
14 Disclosure Standards 1 439
15 Disclosure Standards 2 467
16 Principles of consolidation 497
17 Step acquisitions and disposals 557
18 Complex groups and group reorganisations 593
19 Statements of cash flows 627
20 Foreign exchange issues 667
21 Small company reporting and first –time adoption 701
22 Financial statement analysis 727
Index 757
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KC1 Corporate Financial Reportingiv
Introduction
KC1 Corporate Financial Reporting
At the Corporate Level a student should have achieved comprehensive knowledge on accounting andfinancial reporting, and built on the analytical skills acquired at the Business Level. One should also
have developed advisory capacity on financial reporting, impact of accounting standards, various
accounting options and their implications to management. One should be able to critically analyse
different types of reports produced by an organisation in communicating its results to the stakeholders
and deal with ethical issues arising from financial reporting. The ability to integrate with other
functions of the business is a rounding off skill that is also expected at this level.
Syllabus structure
Main syllabus areas Weightings
1. Interpretation & Application of Sri Lanka Accounting Standards
(SLFRS/LKAS/IFRIC/SIC) 35%
2. Preparation & Presentation of Consolidated Financial Statements 30%
3. Analysis, Interpretations & Communication of Financial Results 25%
4. Corporate Governance & Recent Developments in Financial Reporting 5%
5. Ethical Issues in Financial Reporting and the Regulatory Framework 5%
One of the key elements in examination success is practice. It is important that not only you fully
understand the topics by reading carefully the information contained in this Study Text, but it is also
vital that you practise the techniques and apply the principles that you have learned.
In order to do this, you should:
Work through all the examples provided within the chapters and review the solutions, ensuring
that you understand them;
Complete the progress test for each chapter.
In addition, you should use the Practice & Revision Kit. These questions will provide you with excellent
examination practice when you are in the revision phase of your studies.
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Introduction v
Pillar structure
The Curriculum 2015 is structured around three pillars, namely, Knowledge, Skills and Personal.
The Pillars are subdivided into specific subject areas or sub pillars and content is delivered to meet the
requirements of three progressively ascending levels of competency, namely, Executive, Business and
Corporate.
The Corporate Level aims to produce a CA professional fully equipped with the required knowledge,skills and personality to be a corporate leader.
The Knowledge Pillar focuses on imparting sound technical knowledge required of a competent CA,
and comprises five sub pillars that focus on the following subject areas:
Sub pillar 1: Financial Accounting and Reporting (FA&R)
Sub pillar 2: Management Accounting and Finance (MA&F)
Sub pillar 3: Taxation and Law (T&L)
Sub pillar 4: Assurance and Ethics (A&E)
Sub pillar 5: Management and Contemporary Issues (M&C)
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KC1 Corporate Financial Reportingvi
Chapter features
Each chapter contains a number of helpful features to guide you through each topic.
Topic list This tells you what you will be studying in the chapter. The topic items form
the numbered headings within the chapter.
Chapter
introduction
The introduction puts the chapter topic into perspective and explains why it is
important, both within your studies and within your practical working life.
Learning
Outcomes
The learning outcomes issued for the module by CA Sri Lanka are listed at the
beginning of the chapter, with reference to the chapter section within which
coverage will be found.
Key terms These are definitions of important concepts that you really need to know and
understand before the exam.
Examples These are illustrations of particular techniques or concepts with a worked
solution or explanation provided immediately afterwards.
Case study Often based on real world scenarios and contemporary issues, these examples
or illustrations are designed to enrich your understanding of a topic and add
practical emphasis.
Questions These are questions that enable you to practise a technique or test your
understanding. You will find the answer underneath the question.
Formula to
learn
These are the formula that you are required to learn for the exam.
Section
introduction
This summarises the key points to remember from each section.
Chapter
roundup
This provides a recap of the key areas covered in the chapter.
Progress
Test
Progress tests at the end of each chapter are designed to test your memory.
Bold text Throughout the Study Text you will see that some of the text is in bold type.
This is to add emphasis and to help you to grasp the key elements within a
sentence or paragraph.
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L e a r n i n g o u t c o m e s
v i i
L e a r n i n g o u t c o m e s
C A S r
i L a n k a ’ s L e a r n i n g o u t c o m e s f o r t h e M o d u l e a r e s e t o u t o n t h e f o l l o w i n g p a g e s . T h e y a r e c r o s s - r e f e r e n c e d
t o t h e c h a p t e r i n t h e S t u d y T e x t w
h e r e t h e y a r e
c o v e r
e d .
1 . I n
t e r p r e t a t i o n a n d A p p l i c a t i o n o f S r i L a n k a A c c o u n t i n g S t a n d a r d s ( S L F R S / L K A S / I F R I C / S I C )
( S
y l l a b u s W e i g h t i n g 3 5 % )
K n o w l e d g e C o m p o n e n t
K n o w l e d g e
D i m e n s i o n
K n o w l e d g e
P r o c e s s
L e a r n i n g O u t c o m e
C h a p t e r
1 . 1
L e v e l A
T h o r o u g h k n o w l e d g e a n d c o m p r e h
e n s i o n o f
t h e s t a n d a r d t o i d e n t i f y s i g n i f i c a n t
c o m p l i c a t e d i s s u e s a n d a n y p o t e n t i
a l
i m p l i c a t i o n s t o t h e f i n a n c i a l s t a t e m
e n t s , a n d
t o e x e r c i s e p r o f e s s i o n a l j u d g m e n t i n t h e
e v a l u a t i o n a n d a p p l i c a t i o n o f s t a n d
a r d s i n
r e s o l v i n g a c o m p l i c a t e d m a t t e r r e l a
t e d t o
f i n a n c i a l r e p o r t i n g .
W h e r e :
A “ c o m p l i c a t e d m a t t e r ” i n c l u d e s
t r a n s a c t i o n s a n d / o r e v e n t s w h
i c h
r e q u i r e t h o r o u g h a n a l y s i s o f t h e m a t t e r
a n d e v a l u a t i o n o f s t a n d a r d s .
I t m a y r e q u i r e t h e a n a l y s i s , a p
p l i c a t i o n
a n d e v a l u a t i o n o f r e l e v a n t s t a n d a r d / s .
( R e f e r A p p e n d i x 3 )
M e t a c o g n i t i v e
E
v a l u a t i o n /
S y n t h e s i s
1 . 1 . 1
A d v i s e o n t h
e a p p l i c a t i o n o f S r i L a n k a A c c o u n t i n g
S t a n d a r d s i n s o l v i n g c o m p l i c a t e d m a t t e r s .
1 . 1 . 2
R e c o m m e n d t h e a p p r o p r i a t e a c c o u n t i n g
t r e a t m e n t t o b e u s e d i n c o m p l i c a t e d
c i r c u m s t a n c e s i n a c c o r d a n c e w i t h S r i L a n k a
A c c o u n t i n g
S t a n d a r d s .
1 . 1 . 3
E v a l u a t e t h e o u t c o m e s o f t h e a p p l i c a t i o n o f
d i f f e r e n t a c c o u n t i n g t r e a t m e n t s .
1 . 1 . 4
P r o p o s e a p p r o p r i a t e a c c o u n t i n g p o l i c i e s t o b e
s e l e c t e d i n d i f f e r e n t c i r c u m s t a n c e s .
1 . 1 . 5
E v a l u a t e t h e i m p a c t o f t h e u s e o f d i f f e r e n t e x p e
r t
i n p u t s t o f i n
a n c i a l r e p o r t i n g .
1 . 1 . 6
A d v i s e a p p r
o p r i a t e a p p l i c a t i o n a n d s e l e c t i o n o f
a c c o u n t i n g /
r e p o r t i n g o p t i o n s g i v e n u n d e r
s t a n d a r d s .
1 . 1 . 7
D e s i g n t h e a
p p r o p r i a t e d i s c l o s u r e s t o b e m a d e
i n
t h e f i n a n c i a l s t a t e m e n t s .
1 , 3 , 4 , 5 ,
6 , 7 , 8 , 9 , 1
0 ,
1 1 , 1
2 , 1
3 ,
1 4 , 1
5 , 1
6 ,
1 7 , 1
8 , 1
9 ,
2 0 , 2
1
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K C 1 C
o r p o r a t e F i n a n c i a l R e p o r t i n g
v i i i
1 . I n
t e r p r e t a t i o n a n d A p p l i c a t i o n o f S r i L a n k a A c c o u n t i n g S t a n d a r d s ( S L F R S / L K A S / I F R I C / S I C )
( S
y l l a b u s W e i g h t i n g 3 5 % )
K n o w l e d g e C o m p o n e n t
K n o w l e d g e
D i m e n s i o n
K n o w l e d g e
P r o c e s s
L e a r n i n g O u t c o m e
C h a p t e r
1 . 2
L e v e l B
G o o d k n o w l e d g e a n d c o m p r e h e n s i o n o f t h e
s t a n d a r d t o i d e n t i f y m o d e r a t e l y c o m p l i c a t e d
i s s u e s a n d a n y p o t e n t i a l i m p l i c a t i o n s t o t h e
f i n a n c i a l s t a t e m e n t s , a n d t o e x e r c i s
e
p r o f e s s i o n a l j u d g m e n t i n t h e a n a l y s i s a n d
a p p l i c a t i o n o f s t a n d a r d s i n r e s o l v i n
g a
m o d e r a t e l y c o m p l i c a t e d m a t t e r r e l a t e d t o
f i n a n c i a l r e p o r t i n g .
W h e r e :
A “ m o d e r a t e l y c o m p l i c a t e d m a t t e r ”
i n c l u d e s
t r a n s a c t i o n s a n d / o r e v e n t s w h i c h r
e q u i r e a n
a n a l y s i s o f a m a t t e r a n d e v a l u a t i o n
o f s u c h
m a t t e r w i t h t h e r e l a t e d s t a n d a r d / s .
( R e f e r A p p e n d i x 3 )
C o n c e p t u a l /
P r o c e d u r a l
A
p p l i c a t i o n /
A n a l y s i s /
E v a l u a t e
1 . 2 . 1
A p p l y S r i L a
n k a A c c o u n t i n g S t a n d a r d s i n s o l v i n
g
m o d e r a t e l y
c o m p l i c a t e d m a t t e r s .
1 . 2 . 2
R e c o m m e n d t h e a p p r o p r i a t e a c c o u n t i n g
t r e a t m e n t t o b e u s e d i n c o m p l i c a t e d
c i r c u m s t a n c e s i n a c c o r d a n c e w i t h S r i L a n k a
A c c o u n t i n g
S t a n d a r d s .
1 . 2 . 3
D e m o n s t r a t
e a t h o r o u g h k n o w l e d g e o f S r i L a n k
a
A c c o u n t i n g
s t a n d a r d s i n t h e s e l e c t i o n a n d
a p p l i c a t i o n o f a c c o u n t i n g p o l i c i e s .
1 . 2 . 4
D e m o n s t r a t
e t h e a p p r o p r i a t e a p p l i c a t i o n a n d
s e l e c t i o n o f
a c c o u n t i n g / r e p o r t i n g o p t i o n s g i v e n
u n d e r s t a n d
a r d s .
1 . 2 . 5
O u t l i n e t h e d i s c l o s u r e s t o b e m a d e i n t h e f i n a n c i a l
s t a t e m e n t s .
9 , 1
2 , 1
3 ,
2 0
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L e a r n i n g o u t c o m e s
i x
1 . I n
t e r p r e t a t i o n a n d A p p l i c a t i o n o f S r i L a n k a A c c o u n t i n g S t a n d a r d s ( S L F R S / L K A S / I F R I C / S I C )
( S
y l l a b u s W e i g h t i n g 3 5 % )
K n o w l e d g e C o m p o n e n t
K n o w l e d g e
D i m e n s i o n
K n o w l e d g e
P r o c e s s
L e a r n i n g O u t c o m e
C h a p t e r
1 . 3
L e v e l C
C o n c e p t u a l k n o w l e d g e a n d u n d e r s t a n d i n g o f
t h e s t a n d a r d t o i d e n t i f y s i m p l e i s s u
e s , t o
e x e r c i s e r e a s o n a b l e p r o f e s s i o n a l j u
d g m e n t i n
t h e a p p l i c a t i o n o f s t a n d a r d s i n r e s o
l v i n g a
s i m p l e ( s t r a i g h t f o r w a r d ) m a t t e r r e l a t e d t o
f i n a n c i a l r e p o r t i n g .
W h e r e :
A “ s i m p l e t r a n s a c t i o n o r e v e n t ” i n c l u d e s
t r a n s a c t i o n s o r e v e n t s w h i c h r e q u i r e d i r e c t
a n d c o n c e p t u a l a p p l i c a t i o n o f s t a n d
a r d s .
( R e f e r A p p e n d i x 3 )
C o n c e p t u a l
R
e m e m b e r /
C o m
p r e h e n s i o n /
A
p p l i c a t i o n
1 . 3 . 1
E x p l a i n t h e
c o n c e p t s / p r i n c i p a l s o f S r i L a n k a
A c c o u n t i n g
S t a n d a r d s .
1 . 3 . 2
A p p l y t h e c o
n c e p t s / p r i n c i p a l s o f t h e s t a n d a r d s
t o
r e s o l v e a s i m
p l e / s t r a i g h t f o r w a r d m a t t e r .
1 . 3 . 3
L i s t t h e d i s c
l o s u r e s t o b e m a d e i n t h e f i n a n c i a l
s t a t e m e n t s .
8 , 1
1 , 1
2 ,
2 0
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K C 1 C
o r p o r a t e F i n a n c i a l R e p o r t i n g
x
2 . P
r e p a r a t i o n a n d P r e s e n t a t i o
n o f C o n s o l i d a t e d F i n a n c i a l
S t a t e m e n t s
( S
y l l a b u s W e i g h t i n g 3 0 % )
K n o w l e d g e C o m p o n e n t
K n o w l e d g e
D i m e n s i o n
K n o w l e d g e
P r o c e s s
L e a r n i n g O u t c o m e
C h a p t e r
2 . 1
C o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s
M e t a c o g n i t i v e
S y n t h e s i s
2 . 1 . 1
C o m p i l e c o n
s o l i d a t e d f i n a n c i a l s t a t e m e n t s f o r a
g r o u p w i t h m o r e t h a n t w o s u b s i d i a r i e s , s u b -
s u b s i d i a r i e s
o r f o r e i g n s u b s i d i a r i e s .
2 . 1 . 2
R e c o m p i l e a
c o n s o l i d a t e d s e t o f f i n a n c i a l
s t a t e m e n t s ,
p o s t a c q u i s i t i o n , m e r g e r o r
d i v e s t m e n t .
1 6 , 1
7 , 1
8
2 . 2
J o i n t v e n t u r e s
M e t a c o g n i t i v e
E v a l u a t e /
S y n t h e s i s
2 . 2 . 1
E v a l u a t e t h e i n f o r m a t i o n p r o v i d e d a n d i d e n t i f y
t h e e x i s t e n c
e o f j o i n t v e n t u r e s .
2 . 2 . 2
C o m p i l e f i n a n c i a l s t a t e m e n t s f o r j o i n t v e n t u r e s
.
1 6
2 . 3
I n v e s t m e n t s i n a s s o c i a t e s
P r o c e d u r a l /
M e t a c o g n i t i v e
E v a l u a t e /
S y n t h e s i s
2 . 3 . 1
A d v i s e a p p r
o p r i a t e a c c o u n t i n g t r e a t m e n t t o b e
u s e d w h e n t h e r e i s a n i n v e s t m e n t i n a n a s s o c i a
t e .
2 . 3 . 2
C o m p i l e f i n a n c i a l s t a t e m e n t s w h e n t h e r e i s a n
i n v e s t m e n t
i n a n a s s o c i a t e .
1 6
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L e a r n i n g o u t c o m e s
x i
3 . A
n a l y s i s
, I n t e r p r e t a t i o n s a n d
C o m m u n i c a t i o n o f F i n a n c i a l R e s u l t s
( S
y l l a b u s W e i g h t i n g 2 5 % )
K n o w l e d g e C o m p o n e n t
K n o w l e d g e
D i m e n s i o n
K n o w l e d g e
P r o c e s s
L e a r n i n g O u t c o m e
C h a p t e r
3 . 1
I n
t e r n a l f i n a n c i a l s t a t e m e n t a n a l y s i s
P r o c e d u r a l
E v a l u a t e
3 . 1 . 1
E v a l u a t e t h e r e a s o n a b l e n e s s o f f i n a n c i a l
s t a t e m e n t s r e l a t i v e t o t h e a c t u a l f i n a n c i a l s t a t u s
o f a n e n t i t y .
2 2
3 . 2
E x t e r n a l f i n a n c i a l s t a t e m e n t s a n a l y
s i s
C o m m o n s i z e a n a l y s i s
T r e n d a n a l y s i s
P r o c e d u r a l
E v a l u a t e
3 . 2 . 1
E v a l u a t e e
x t e r n a l f i n a n c i a l s t a t e m e n t s .
3 . 2 . 2
C r i t i c i s e e x t e r n a l f i n a n c i a l s t a t e m e n t s , o n t h e
b a s i s o f r e
l e v a n t a n d r a t i o n a l c o n c l u s i o n s d r a
w n
f r o m t h e f i n a n c i a l s t a t e m e n t s a n a l y s i s .
2 2
4 . C
o r p o r a t e G o v e r n a n c e a n d R
e c e n t D e v e l o p m e n t s i n F i n a n c i a l R e p o r t i n g
( S
y l l a b u s W e i g h t i n g 5 % )
K n o w l e d g e C o m p o n e n t
K n o w l e d g e
D i m e n s i o n
K n o w l e d g e
P r o c e s s
L e a r n i n g O u t c o m e
C h a p t e r
4 . 1
C o r p o r a t e g o v e r n a n c e a n d s u s t a i n a
b i l i t y
r e p o r t s i n c l u d i n g i n t e g r a t e d r e p o r t
i n g
M e t a c o g n i t i v e
E v a l u a t e /
S y n t h e s i s
4 . 1 . 1
C r i t i c i s e a n a n n u a l r e p o r t o f a c o m p a n y i n a
g i v e n s c e n
a r i o , o n t h e b a s i s o f a d e q u a c y o f
d i s c l o s u r e
s .
4 . 1 . 2
C o m p i l e a n i n t e g r a t e d r e p o r t a l o n g w i t h a
s u s t a i n a b i l i t y r e p o r t f o r a g i v e n e n t i t y .
4 . 1 . 3
E v a l u a t e i n t e g r a t e d / s u s t a i n a b i l i t y r e p o r t s i n
a c c o r d a n c
e w i t h t h e “ t r i p l e b o t t o m l i n e
p r i n c i p l e ”
a n d G R I g u i d e l i n e s .
2 2 2
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K C 1 C
o r p o r a t e F i n a n c i a l R e p o r t i n g
x i i
4 . C
o r p o r a t e G o v e r n a n c e a n d R
e c e n t D e v e l o p m e n t s i n F i n a n c i a l R e p o r t i n g
( S
y l l a b u s W e i g h t i n g 5 % )
K n o w l e d g e C o m p o n e n t
K n o w l e d g e
D i m e n s i o n
K n o w l e d g e
P r o c e s s
L e a r n i n g O u t c o m e
C h a p t e r
4 . 2
N e w e x p o s u r e d r a f t s
P r o c e d u r a l
E v a l u a t e
4 . 2 . 1
E v a l u a t e t h e p o s s i b l e i m p a c t o f n e w e x p o s u r e
d r a f t s o n f
i n a n c i a l s t a t e m e n t s .
1
5 . E
t h i c a l I s s u e s i n F i n a n c i a l R e
p o r t i n g a n d t h e R e g u l a t o r y
F r a m e w o r k
( S
y l l a b u s W e i g h t i n g 5 % )
K n o w l e d g e C o m p o n e n t
K n o w l e d g e
D i m e n s i o n
K n o w l e d g e
P r o c e s s
L e a r n i n g O u t c o m e
C h a p t e r
5 . 1
R e c e n t e t h i c a l i s s u e s
M e t a c o g n i t i v e
E v a l u a t e
5 . 1 . 1
A d v i s e o n a c c u r a t e p r e s e n t a t i o n o f f i n a n c i a l
s t a t e m e n t s f o r a g i v e n s e t o f c i r c u m s t a n c e s , w i t h
r e f e r e n c e t o
g l o b a l e x a m p l e s .
1
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Action verbs checklist xiii
Action verbs checklist
Knowledge Process Verb List Verb DefinitionsDefine Describe exactly the nature, scope or meaning
Draw Produce (a picture or diagram)
Identify Recognise, establish or select after
consideration
List Write the connected items one below the other
Relate To establish logical or causal connections
Tier – 1 Remember
Recall important information
State Express something definitely or clearly
Calculate/
Compute
Make a mathematical computation
Discuss Examine in detail by argument showing
different aspects, for the purpose of arriving at
a conclusion
Explain Make a clear description in detail revealing
relevant facts
Interpret Present in understandable terms or to translate
Recognise To show validity or otherwise, using knowledge
or contextual experience
Record Enter relevant entries in detail
Tier – 2 Comprehension
Explain important
information
Summarise Give a brief statement of the main points (in
facts or figures)
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KC1 Corporate Financial Reportingxiv
Knowledge Process Verb List Verb Definitions
Apply Put to practical use
Assess Determine the value, nature, ability or quality
Demonstrate Prove, especially with examples
Graph Represent by means of a graph
Prepare Make ready for a particular purpose
Prioritise Arrange or do in order of importance
Reconcile Make consistent with another
Tier – 3 Application
Use knowledge in a setting
other than the one in which it
was learned/solve close-
ended problems
Solve To find a solution through calculations and/or
explanations
Analyse Examine in detail in order to determine the
solution or outcome
Compare Examine for the purpose of discovering
similarities
Contrast Examine in order to show unlikeness or
differences
Differentiate Constitute a difference that distinguishes
something
Tier – 4 Analysis
Draw relations among ideasand to compare and
contrast/solve open-ended
problems
Outline Make a summary of significant features
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Action verbs checklist xv
Knowledge Process Verb List Verb Definitions
Advise Offer suggestions about the best course of
action in a manner suited to the recipient
Convince To persuade others to believe something using
evidence and/or argument
Criticise Form and express a judgment
Evaluate To determine the significance by careful
appraisal
Recommend A suggestion or proposal as to the best course
of action
Resolve Settle or find a solution to a problem or
contentious matter
Tier – 5 Evaluate
Formation of judgments and
decisions about the value of
methods, ideas, people or
products
Validate Check or prove the accuracy
Compile Produce by assembling information collected
from various sources
Design Devise the form or structure according to a plan
Develop To disclose, discover, perfect or unfold a plan or
idea
Tier – 6 Synthesis
Solve unfamiliar problems by
combining different aspects
to form a unique or novel
solution
Propose To form or declare a plan or intention for
consideration or adoption
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1
Knowledge Component
1 Interpretation and Application of Sri Lanka Accounting Standards (SLFRS /
LKAS / IFRIC / SIC)
1.1 Level A 1.1.1 Advise on the application of Sri Lanka Accounting Standards in solving
complicated matters.
1.1.2 Recommend the appropriate accounting treatment to be used in complicated
circumstances in accordance with Sri Lanka Accounting Standards.
1.1.3 Evaluate the outcomes of the application of different accounting treatments.
1.1.4 Propose appropriate accounting policies to be selected in different
circumstances.
1.1.5 Evaluate the impact of the use of different expert inputs to financial reporting.
1.1.6 Advise appropriate application and selection of accounting/reporting options
given under standards.
1.1.7 Design the appropriate disclosures to be made in the financial statements.
4 Corporate Governance and Recent Developments in Financial Reporting
4.2 New exposure
drafts
4.2.1 Evaluate the possible impact of new exposure drafts on financial statements
5 Ethical Issues in Financial Reporting and the Regulatory Framework
5.1 Recent ethical
issues
5.1.1 Advise on accurate presentation of financial statements for a given set of
circumstances, with reference to global examples.
C H A P T E
R
INTRODUCTION
This chapter revises the regulatory and conceptual frameworks studied at KB1 together with SLFRS
13 Fair Value Measurement . The chapter also considers current developments in financial reporting.
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CHAPTER CONTENTS
1 The regulatory framework
2 Ethics
3 The Conceptual Framework
4 SLFRS 13 Fair Value Measurement
SLFRS 13 Learning objectives
• Advise on the fair value measurement in relation to non-financial assets,
liabilities, entity’s own equity instruments, financial assets and financial
liabilities.
• Discuss valuation techniques, input to valuation techniques and fair value
hierarchy.
• Advise on accounting treatment to be used at fair value measurement at initial
recognition.
• Evaluate the impact of fair value adjustments on financial statements.
• Apply the requirements in preparation of disclosures.
1 The Regulatory Framework
The regulatory framework of financial reporting refers to the many sources of
regulation, including accounting standards, company law and stock exchange
rules.
1.1 Sri Lankan GAAP
Sri Lankan GAAP (Generally Accepted Accounting Practice) includes the following
mandatory sources:
1. The Companies Act
2. SEC Regulations and rulings (applicable only for listed companies)
3. Accounting standards as issued by the Institute of Chartered Accountants of
Sri Lanka (CA Sri Lanka).
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1.1.1 The Companies Act
Companies Act No 07 of 2007 regulates the affairs of limited liability companies.
The relevant sections are as follows:
Section 56 When a company makes any distribution to any shareholder, it is
required to maintain a solvent position and a certificate of
solvency should be provided by the auditors.
Section 69 Shares must be redeemed on the specified date where a
company has an obligation to do so. Otherwise shareholders are
ranked as unsecured creditors.
Section 148 Every company should keep accounting records that correctly
record and explain the company’s transactions.
Section 171 A company must have a reporting date in each calendar year; an
exception is after incorporation when the first reporting date
must be within 15 months of incorporation. No accounting
period can exceed 15 months.
Section 192 Directors' interests in transactions must be entered in the
interest register and disclosed to other Board members.
For further details of the content of these sections, refer to your KB1 study text.
1.1.2 SEC Regulations
SEC Rules govern the listing of Securities on the Exchange and continuing listing
requirements in order to ensure the creation and maintenance of a market in
which Securities can be issued and traded in an orderly and fair manner and
which secures efficiency and confidence of all stakeholders in the operation and
conduct of the market. The rules are summarised below:
Initial listing A company applying to list must comply with the Rules and
enter into a listing undertaking (a binding contract) with the
Exchange.
Listing of
shares and
debentures
An offer for subscription or offer for sale of shares or debt is
issued for cash only. In the case of a listing by introduction,
shares or debt must have been allotted at least 6 months
previously. In order to be listed, debt securities must be fully
paid and freely transferable.
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Prospectus
and
introductory
documents
The Rules set out the basic requirements for the contents of a
prospectus. The Exchange is within its rights to require
additional information to be disclosed.
Further issue
of securities of
a listed entity
Further shares of the same class as shares already listed may
not be issued until approved by the Exchange.
In the case of an application to issue another class of shares, the
total value of all the other classes of shares issued at any given
time (as set out in the latest statement of financial position of
the Entity), must not exceed fifteen percent of the entity’s
shareholders funds (ie stated capital and reserves).
A rights issue or issue through public subscription is for cash
only.
Articles of
association/
other
corresponding
documents
Must contain the following provisions:
– Shares must be freely transferable and registration not
subject to restriction
– Notices must be published in Sinhala, Tamil and English
newspapers
– More than 3 persons may not be registered as joint holders of
shares other than in relation to a deceased member
– The company must comply with the Rules.
Continuing
listing
requirements
It is the duty of the board of directors of every listed entity to
ensure that all the Rules of the Exchange are met on a
continuing basis as long as the entity remains listed.
Corporate
disclosure
A listed entity must make immediate disclosure of price
sensitive information to the Exchange in order to ensure the
maintenance of a fair and orderly securities market.
Related party
transactions
The Rules provide certain measures to prevent directors, chief
executive officers or substantial shareholders taking advantage
of their positions.
Enforcement Non-compliance with the Rules or failure to pay interest on
listed debt securities will result in the transfer of listed
securities to the Default Board.
For further details of the content of the rules, refer to your KB1 study text.
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1.1.3 Accounting standards
The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) issues
accounting standards in Sri Lanka. In 2011 it decided to converge fully with all
pronouncements made by the International Accounting Standards Board (IASB)
and thereafter to adopt all new pronouncements of the IASB.
The IASB issues IFRS, which are adopted by CA Sri Lanka as SLFRS. Previously
issued IASs have been adopted in Sri Lanka as LKAS. The following SLFRS and
LKAS are examinable at KC1:
Title
LKAS 1 Presentation of financial statements
LKAS 2 Inventories
LKAS 7 Statement of cash flows
LKAS 8 Accounting policies, changes in accounting estimates and errors
LKAS 10 Events after the reporting period
LKAS 11 Construction Contracts
LKAS 12 Income taxes
LKAS 16 Property, plant and equipment
LKAS 17 Leases
LKAS 18 Revenue
LKAS 19 Employee benefits
LKAS 20 Accounting for government grants and disclosure of government
assistance
LKAS 21 The effects of changes in foreign exchange rates
LKAS 23 Borrowing costs
LKAS 24 Related party disclosures
LKAS 26 Accounting and Reporting by Retirement Benefit Plans
LKAS 27 Separate financial statements
LKAS 28 Investments in associates and joint ventures
LKAS 29 Financial Reporting in Hyperinflationary Economies
LKAS 32 Financial Instruments: presentation
LKAS 33 Earnings per share
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Title
LKAS 34 Interim financial reporting
LKAS 36 Impairment of assets
LKAS 37 Provisions, contingent liabilities and contingent assets
LKAS 38 Intangible assets
LKAS 39 Financial Instruments: recognition and measurement
LKAS 40 Investment property
LKAS 41 Agriculture
SLFRS 1 First time adoption of SLFRS
SLFRS 2 Share-based paymentSLFRS 3 Business combinations
SLFRS 4 Insurance Contracts
SLFRS 5 Non-current assets held for sale and discontinued operations
SLFRS 6 Exploration for and Evaluation of Mineral Resources
SLFRS 7 Financial instruments: disclosures
SLFRS 8 Operating segments
SLFRS 9* Financial instruments
SLFRS 10 Consolidated financial statements
SLFRS 11 Joint arrangements
SLFRS 12 Disclosure of interests in other entities
SLFRS 13 Fair value measurement
SLFRS 15* Revenue from contracts with customers
SLFRS For Small and Medium-sized Entities
*SLFRS 9 and SLFRS 15 are not yet effective; therefore they are examinable as
current developments rather than in full detail.
The Sri Lanka Accounting and Auditing Standards Act No 15 of 1995 requires all
special business enterprises to comply with accounting standards established by
CA Sri Lanka. Therefore full SLFRS must be applied by:
• All companies with debt or equity securities traded in a public market in Sri
Lanka (in both separate and consolidated financial statements), and
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• Specified Business Enterprises (SBEs), including banks, insurance companies
and other financial institutions.
Other companies may apply either full SLFRS or the SLFRS for SMEs.
1.1.4 Interpretations
Interpretations, referred to as IFRICs (or previously SICs) are issued by the IFRS
Interpretations Committee as necessary to:
• Interpret the application of IFRS
• Provide timely guidance on financial reporting issues not specifically addressed
in IFRS
They are therefore of limited scope in nature, dealing with specific issues only. The
Interpretations that are examinable at KC 1 are:
Title
IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar
Liabilities
IFRIC 2 Members’ Share in Cooperative Entities and Similar Instruments
IFRIC 4 Determining whether an Arrangement contains a Lease
IFRIC 5 Rights to Interests arising from Decommissioning, Restorationand Environmental Rehabilitation Funds
IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste
Electrical and Electronic Equipment
IFRIC 7 Applying the Restatement Approach under IAS 29 Financial
Reporting in Hyperinflationary Economies
IFRIC 9 Reassessment of Embedded Derivatives
IFRIC 10 Interim Reporting and Impairment
IFRIC 12 Service Concession Arrangements
IFRIC 13 Customer Loyalty Programmes
IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction
IFRIC 15 Agreements for the Construction of Real Estate
IFRIC 16 Hedge of a Net Investment in a Foreign Operation
IFRIC 17 Distributions of Non-cash Assets to Owners
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Title
IFRIC 18 Transfers of Assets from Customers
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine
SIC 15 Operating Leases – Incentives
SIC 25 Income Taxes – Change in the Tax Status of an Entity or its
Shareholder
SIC 27 Evaluating the Substance of Transactions in the Legal Form of a
Lease
SIC 29 Disclosure – Service Concession Arrangements
SIC 31 Revenue – Barter Transactions Involving Advertising Services
SIC 32 Intangible Assets – Website Costs
Interpretations form part of full SLFRS and are therefore applicable by those
companies that apply full SLFRS.
1.2 The development of accounting standards
1.2.1 Development of new and revised accounting standards by the IASB
The IASB has a six-step due process to develop new standards or revise existing
standards. The steps are as follows:
1. Setting the agenda involves identifying an item and adding it to the IASB’s
work agenda.
2. Planning the project involves the IASB deciding whether to conduct a project
alone or jointly with a national standard-setter.
3. Developing and publishing the discussion paper (a non-mandatory step). A
discussion paper includes an overview of the issue being addressed and
possible approaches to addressing it. It is published and interested parties
are invited to comment.
4. Developing and publishing the exposure draft (a mandatory step). An
exposure draft (ED) is a proposed standard, and is the IASB’s main vehicle
for consulting the public about proposals.
5. Developing and publishing the standard. A standard is published after
comments received on the ED are considered. In the light of these a topic
may be re-exposed (ie a second ED is published) prior to the finalisation of
the standard.
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6. After the standard is issued the IASB monitors its use and application in order
to identify whether further amendments are required. A post-implementation
review, being a formal review, normally takes place in respect of major new
standards and amendments, usually after they have been applied for two
years (which is normally 30-36 months after their effective date).
CA Sri Lanka has input into step 4 as follows:
1. IASB exposure drafts and draft interpretations are exposed for public
comment by CA Sri Lanka.
2. At the same time CA Sri Lanka conducts round table discussions to identify
the impact of the proposed standard in Sri Lanka.
3. Sri Lanka forwards its views to the IASB.
1.2.2 Adoption of new and revised standards by CA Sri Lanka
The process by which CA Sri Lanka adopts finalised IFRS as SLFRS is as follows:
1. CA Sri Lanka reviews the IFRS and related technical materials. This may
result in modification of the standard for use in Sri Lanka, or deferral of a
standard’s adoption.
2. The standard is translated into Sinhala and Tamil and published in the Extra
Ordinary Gazette as required by the Accounting and Auditing Standards Act
No: 15 of 1995 in Sri Lanka.
Once gazetted, the standard becomes legally authoritative.
1.3 Current developments
The IASB has a detailed work plan with a number of projects on-going at any given
time. In this section we consider a number of these projects. The status of the
projects is as at 20 December 2014.
1.3.1 Early stage projects
There are a number of projects that have been added to the IASB’s work agenda,
but as yet no discussion paper or exposure draft has been issued. Most of these
projects are narrow-scope, however there is one major early stage project, dealing
with the principles of disclosure. The objective of this project is to identify and
develop a set of principles for disclosure in IFRS.
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1.3.2 Discussion papers in issue
Discussion papers on the following topics are currently in issue:
A Portfolio Revaluation approach to Macro Hedging – a project related to
financial instruments that aims to develop an approach to better reflect thedynamic risk management activities of entities in their financial statements.
Rate Regulated Activities – rate-regulated activities are those activities that an
entity provides but subject to government regulation in respect of supply and
pricing eg gas, electricity and water. The discussion paper explores possible
approaches to reporting the financial effects of this type of regulation. This
project aims to provide a long-term solution to the issue of accounting for rate-
regulated activities; in the meantime an interim standard (IFRS 14) was issued
in 2012 to provide short-term guidance (see section 1.4).
1.3.3 Exposure drafts in issue
Exposure drafts in issue relate to major projects and narrow-scope amendments.
Major projects
Leases – A project to replace IAS 17 Leases has been on the IASB’s work plan for
a number of years. An exposure draft was issued in 2010 and a revised
exposure draft in 2013. The proposed amendments are considered in more
detail in Chapter 7 Leases.
Insurance Contracts – This major project to undertake a comprehensive review
of accounting for insurance contracts was added to the IASB’s agenda in 2001.
A first ED was issued in 2010 and a second in 2013. The proposed amendments
are considered in more detail in Chapter 12 Financial Instruments.
Narrow-scope amendments
Measuring quoted investments in subsidiaries, joint ventures and associates at
fair value (proposed amendments to IFRS 10, IFRS 12, IFRS 13, IAS 27, IAS 28
and IAS 36). The proposed amendments clarify that the fair value of an
investment in the financial instruments of a subsidiary, joint venture or
associate quoted in an active market is calculated based on the quoted price
without adjustment for the level of shareholding.
Recognition of Deferred Tax Assets for Unrealised Losses (proposed
amendments to IAS 12) clarifies how to account for deferred tax assets related
to debt instruments measured at fair value. For further detail see Chapter 11
Income Taxes.
Disclosure initiative (proposed amendments to IAS 7). The proposed
amendments are to improve the information provided in financial statements
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about an entity’s financing activities and provide disclosures that help users to
understand the liquidity of an entity. Further detail is provided in Chapter 19
Statements of Cash Flows.
Classification and measurement of Share-based payment transactions
(proposed amendment to IFRS 2). The proposed amendments clarify
accounting where there is a performance vesting condition or a modification
and classification where there is a net settlement feature. The proposed
amendments are considered in more detail in Chapter 13 Employee benefits.
1.3.4 Recently issued standards
Two major standards were issued in 2014 but are not examinable within this
edition of the KC1 study text. They are:
IFRS 9 Financial Instruments (effective 1 January 2018), and
IFRS 15 Revenue from Contracts with Customers (effective 1 January 2017).
The full detail of the impact of these standards is discussed in the relevant
chapters (Chapter 12 Financial Instruments and Chapter 10 Revenue).
IFRS 14 Regulatory Deferral Accounts was also issued in 2014. This standard is an
interim standard applicable whilst the IASB works on its rate-regulated activities
project. The new standard permits an entity adopting IFRS for the first time to
continue to account for regulatory deferral account balances in accordance withits previous GAAP.
Amended standards
In addition to the new standards detailed above, the following amended standards
have been issued by the IASB.
Clarification of acceptable methods of
depreciation and amortisation
amendments to IAS 16 and IAS 38
(effective 1 January 2016)
The amendment clarifies that a revenue-
based depreciation/amortisation method
is not appropriate because it reflects a
pattern of economic benefits being
generated from the asset rather than the
expected pattern of consumption of future
economic benefits embodied in the asset.
Accounting for acquisitions of
interests in joint operations
amendments to IFRS 11 (effective 1
January 2016)
The amendments require that where an
entity acquires an interest in a joint
operation that constitutes a business, IFRS
3 principles should be applied and
therefore goodwill may be recognised.
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Agriculture: Bearer plants
amendments to IAS 16 and IAS 41
(effective 1 January 2016)
A bearer plant (a plant held solely to grow
produce over its productive life) is
brought within the scope of IAS 16 rather
than IAS 41.
Equity method in Separate Financial
Statements amendments to IAS 27
(effective 1 January 2016)
The amendments allow an entity to apply
the equity method when accounting for
investments in subsidiaries, joint ventures
and associates in its separate financial
statements.
Sale or contribution of assets
between an investor and its associate
or joint venture – amendments to
IFRS 10 and IAS 28 (effective 1
January 2016)
The amendments clarify that in a
transaction involving an associate or joint
venture, the extent of gain or loss
recognition depends on whether the
assets sold or contributed constitute a
business
Disclosure initiative – amendments
to IAS 1 (effective 1 January 2016)
Narrow focus amendments to IAS 1 in
order to alleviate problems with over
disclosure and
aggregation/disaggregation
Investment Entities – applying the
Consolidation Exception –
amendments to IFRS 10, IFRS 12 and
IAS 28 (effective 1 January 2016)
The amendments clarify certain issues in
accounting for investment entities.
1.3.5 Post-implementation reviews
The following post-implementation reviews are currently underway:
(1) IFRS for SMEs
When the IFRS for SMEs was first issued, the IASB committed to undertake
an initial comprehensive review of it after the first two full years of
application in order to assess whether amendments were necessary.
This review process began in 2012 and an exposure draft of proposed
amendments was issued in 2013. The majority of the proposed changes
concern clarifications to the current text and will not result in a change in the
way that entities account for certain transactions and events. The one
exception to this is a change to the section on income taxes in order to align
its requirements with those of IAS 12.
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(2) IFRS 3 Business Combinations
IFRS 3 was revised in 2008, with the new requirements taking effect on
1 July 2009. A post-implementation review therefore began in January 2014
with a request for information on experience with, and the effects of,
implementing the standard.
1.4 Annual Improvements
The annual improvements programme is a vehicle through which the IASB makes
non-urgent, but necessary amendments to IFRS. The amendments made through
this process are clarifications of guidance and wording or corrections of minor
unintended consequences, conflicts or oversights.
Each annual improvements cycle lasts for two years from the identification ofissues to the final amendments; an omnibus exposure draft is issued midway
through the process, which contains proposed amendments to all standards under
consideration.
Annual improvements from the 2012-2014 cycle were issued in September 2014,
and the IASB is now working on the 2014-2016 cycle, having discontinued the
2013-2015 cycle in July 2014 in the light of there only being one proposed
amendment.
2 Ethics
Accountants must behave ethically and abide by ethical codes in order to apply
accounting standards correctly and achieve a fair presentation of financial
statements.
As we have seen, a regulatory framework of financial reporting exists, which
includes company law and accounting standards. Such a regulatory framework is
necessary in order to ensure that a company’s financial position and performance
is fairly presented in its financial statements. This is turn is important because the
financial statements are relied on by investors, lenders and other users in order to
make economic decisions.
A regulatory framework can, however, only go so far in achieving an
outcome of fair presentation. In addition, the individuals who prepare the
financial statements must ensure that they adhere to the regulatory
framework. This raises the issue of professional ethics and ethical
behaviour.
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2.1 Professional ethics
Professional ethics are the principles and standards that underlie the
responsibilities and conduct of a person in performing their function in a
particular field of expertise.
Chartered accountants of Sri Lanka are bound by the Code of Ethics for
Professional Accountants issued by CA Sri Lanka. This is based on the Code of
Ethics for Professional Accountants published by the International Federation of
Accountants. The fundamental principles contained within this Code are:
Integrity. Members should be straightforward and honest in all professional
and business relationships.
Objectivity. Members should not allow bias, conflict of interest or undue
influence of others to override professional or business judgements.
Professional Competence and Due Care. Members have a continuing duty to
maintain professional knowledge and skill at a level required to ensure that a
client or employer receives the advantage of competent professional service
based on current developments in practice, legislation and techniques.
Members should