What is a Going Concern?
Going concern is one the fundamental assumptions in accounting on the basis of which financial statements are prepared. Financial statements are prepared assuming that a business entity will continue to operate in the foreseeable future without the need or intention on the part of management to liquidate the entity or to significantly curtail its operational activities. Therefore, it is assumed that the entity will realize its assets and settle its obligations in the normal course of the business.It is the responsibility of the management of a company to determine whether the going concern assumption is appropriate in the preparation of financial statements. If the going concern assumption is considered by the management to be invalid, the financial statements of the entity would need to be prepared on break up basis. This means that assets will be recognized at amount which is expected to be realized from its sale (net of selling costs) rather than from its continuing use in the ordinary course of the business. Assets are valued for their individual worth rather than their value as a combined unit. Liabilities shall be recognized at amounts that are likely to be settled.
What are possible indications of going concern problems?
- Deteriorating liquidity position of a company not backed by sufficient financing arrangements.
- High financial risk arising from increased gearing level rendering the company vulnerable to delays in payment of interest and loan principle.
- Significant trading losses bieng incurred for several years. Profitability of a company is essential for its survival in the long term.
- Aggressive growth strategy not backed by sufficient finance which ultimately leads to over trading.
- Increasing level of short term borrowing and overdraft not supported by increase in business.
- Inability of the company to maintain liquidity ratios as defined in the loan covenants.
- Serious litigations faced by a company which does not have the financial strength to pay the possible settlement.
- Inability of a company to develop a new range of commercially successful products. Innovation is often said to be the key to the long-term stability of any company.
- Bankruptcy of a major customer of the company.
- See more at: http://accounting-simplified.com/financial-accounting/accounting-concepts-and-principles/going-concern.html#sthash.S54xOwY9.dpuf
Fair Presentation and Compliance with IFRS, how IAS 1 rules it ?
IAS 1 Presentation of Financial Statements paragraphs 15-24 rules the fair presentation and compliance with IFRS of financial statement presentation.Par. 15 stated that financial statements shall present fairly the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework.
The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation.
Par. 16 expressed that an entity whose financial statements comply with IFRSs shall make an explicit and unreserved statement of such compliance in the notes. An entity shall not describe financial statements as complying with IFRSs unless they comply with all the requirements of IFRSs.
In virtually all circumstances, an entity achieves a fair presentation by compliance with applicable IFRSs.
A fair presentation also requires an entity:
(a) To select and apply accounting policies in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. IAS 8 sets out a hierarchy of authoritative guidance that management considers in the absence of an IFRS that specifically applies to an item.
(b) To present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information.
(c) To provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.
Par. 18 rules that an entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or explanatory material.
While in par. 19, it stated that in the extremely rare circumstances in which management concludes that compliance with a requirement in an IFRS would be so misleading that it would conflict with the objective of financial statements set out in the Framework, the entity shall depart from that requirement in the manner set out in paragraph 20 if the relevant regulatory framework requires, or otherwise does not prohibit, such a departure.
Par. 20 said that when an entity departs from a requirement of an IFRS in accordance with par. 19, it shall disclose :
(a) That management has concluded that the financial statements present fairly the entity’s financial position, financial performance and cash flows;
(b) That is has complied with applicable IFRSs, except that it has departed from a particular requirement to achieve a fair presentation;
(c) The title of the IFRS from which the entity has departed, the nature of the departure, including the treatment that the IFRS would require, the reason why that treatment would be so misleading in the circumstances that it would conflict with the objective of financial statements set out in the Framework, and the treatment adopted; and
(d) For each period presented, the financial effect of the departure on each item in the financial statements that would have been reported in complying with the requirement.
Further, par. 21 of IAS 1 stated that when an entity has departed from a requirement of an IFRS in a prior period, and that departure affects the amounts recognized in the financial statements for the current period, it shall make the disclosures set out in paragraph 20(c) and (d).
Par. 21 applies, for example, when an entity departed in a prior period from a requirement in an IFRS for the measurement of assets or liabilities and that departure affects the measurement of changes in assets and liabilities recognized in the current period’s financial statements.
Par. 23 stated that in the extremely rare circumstances in which management concluded that compliance with a requirement in an IFRS would be so misleading that it would conflict with the objective of financial statements set out in the Framework, but the relevant regulatory framework prohibits departure from the requirement, the entity shall, to the maximum extent possible, reduce the perceived misleading aspects of compliance by disclosing:
(a) The title of the IFRS in question, the nature of the requirement, and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework; and
(b) For each period presented, the adjustments to each item in the financial statements that management has concluded would be necessary to achieve a fair presentation.
Latest, par. 24 stated that for the purpose of par. 19-23, an item of information would conflict with the objective of financial statements when it does not represent faithfully the transactions, other events and conditions that it either purports to represent or could reasonably be expected to represent and, consequently, it would be likely to influence economic decisions made by users of financial statements.
When assessing whether complying with a specific requirement in an IFRS would be so misleading that it would conflict with the objective of financial statements set out in the Framework, management considers :
(a) Why the objective of financial statements is not achieved in the particular circumstances; and
(b) How the entity’s circumstances differ from those of other entities that comply with the requirement. If other entities in similar circumstances comply with the requirement, there is a rebuttable presumption that the entity’s compliance with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework.
What is the accrual basis of accounting?
Under the accrual basis of accounting, revenues are reported on the income statement
when they are earned. (Under the cash basis of accounting, revenues
are reported on the income statement when the cash is received.) Under the
accrual basis of accounting, expenses are matched with the related revenues
and/or are reported when the expense occurs, not when the cash is paid. The
result of accrual accounting is an income statement that better measures the
profitability of a company during a specific time period.
For example, if I begin an accounting service in December and provide $10,000 of accounting services in December, but don't receive any of the money from the clients until January, there will be a difference in the income statements for December and January under the accrual and cash bases of accounting. Under the accrual basis, my income statements will show $10,000 of revenues in December and none of those services will be reported as revenues in January. Under the cash basis, my December income statement will show no revenues. Instead, the December services will be reported as January revenues under the cash method.
There will be a difference on the balance sheet, too. Under the accrual basis, the December balance sheet will report accounts receivable of $10,000 and the estimated true profit will be added to owner's equity or retained earnings. Under the cash basis, the $10,000 of accounts receivable will not be reported as an asset, and the true profit will not be included in owner's equity or retained earnings.
To illustrate a difference in expenses, we will assume that the heat and light expense that I used in my accounting service is metered by the utility on the last day of the month. The utilities that I used in December will appear on a bill that I receive in January and will pay on February 1. Under the accrual basis of accounting, the utilities that I used in December will be estimated and will be reported as an expense and a liability on the December financial statements. Under the cash basis of accounting, the utilities used in December will be recorded as an expense on February 1, when the utility bills are paid.
For financial statements prepared in accordance with generally accepted accounting principles, the accrual method is required because of the matching principle.
For example, if I begin an accounting service in December and provide $10,000 of accounting services in December, but don't receive any of the money from the clients until January, there will be a difference in the income statements for December and January under the accrual and cash bases of accounting. Under the accrual basis, my income statements will show $10,000 of revenues in December and none of those services will be reported as revenues in January. Under the cash basis, my December income statement will show no revenues. Instead, the December services will be reported as January revenues under the cash method.
There will be a difference on the balance sheet, too. Under the accrual basis, the December balance sheet will report accounts receivable of $10,000 and the estimated true profit will be added to owner's equity or retained earnings. Under the cash basis, the $10,000 of accounts receivable will not be reported as an asset, and the true profit will not be included in owner's equity or retained earnings.
To illustrate a difference in expenses, we will assume that the heat and light expense that I used in my accounting service is metered by the utility on the last day of the month. The utilities that I used in December will appear on a bill that I receive in January and will pay on February 1. Under the accrual basis of accounting, the utilities that I used in December will be estimated and will be reported as an expense and a liability on the December financial statements. Under the cash basis of accounting, the utilities used in December will be recorded as an expense on February 1, when the utility bills are paid.
For financial statements prepared in accordance with generally accepted accounting principles, the accrual method is required because of the matching principle.
What is materiality?
In accounting, the concept of materiality allows you to
violate another accounting principle if the
amount is so small that the reader of the financial statements will not be
misled.
A classic example of the materiality concept or the materiality principle is the immediate expensing of a $10 wastebasket that has a useful life of 10 years. The matching principle directs you to record the wastebasket as an asset and then depreciate its cost over its useful life of 10 years. The materiality principle allows you to expense the entire $10 in the year it is acquired instead of recording depreciation expense of $1 per year for 10 years. The reason is that no investor, creditor, or other interested party would be misled by not depreciating the wastebasket over a 10-year period.
Determining what is a material or significant amount can require professional judgment. For example, $5,000 might be immaterial for a large, profitable corporation, but it will be material or significant for a small company that has very little profit.
A classic example of the materiality concept or the materiality principle is the immediate expensing of a $10 wastebasket that has a useful life of 10 years. The matching principle directs you to record the wastebasket as an asset and then depreciate its cost over its useful life of 10 years. The materiality principle allows you to expense the entire $10 in the year it is acquired instead of recording depreciation expense of $1 per year for 10 years. The reason is that no investor, creditor, or other interested party would be misled by not depreciating the wastebasket over a 10-year period.
Determining what is a material or significant amount can require professional judgment. For example, $5,000 might be immaterial for a large, profitable corporation, but it will be material or significant for a small company that has very little profit.
DEFINITION of 'Offset'
1. To liquidate a futures position by entering an equivalent, but opposite, transaction which eliminates the delivery obligation.2. To reduce an investor's net position in an investment to zero, so that no further gains or losses will be experienced from that position.
INVESTOPEDIA EXPLAINS 'Offset'
1. Investors will offset futures contracts and other investment positions in order to remove themselves from any associated liabilities. Almost all futures positions are offset before the terms of the futures contract are realized. Despite the fact that most positions are offset near the delivery term, the benefits of the futures contract as a hedging mechanism are still realized.2. If the initial investment was a purchase, a sale is made to neutralize the position; to offset an initial sale, a purchase is made to neutralize the position. For example, if you wanted to offset a long position in a stock, you could short sell an identical number of shares. By doing so, your net ownership of the stock would be zero, and you would not incur any further gains or losses from the position.
Comparative Information of financial statements based on IAS 1
Except when IFRSs permit or require otherwise, an entity shall disclose comparative information in respect of the previous period for all amounts reported in the current period's financial statements. An entity shall include comparative information for narrative and descriptive information when it is relevant to an understanding of the current period's financial statements (IAS 1 par. 38).Par. 39 stated that an entity disclosing comparative information shall present, as a minimum, two statements of financial position, two of each of the other statements, and related notes. When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements or when it reclassifies items in its financial statements, it shall present, as a minimum, three statements of financial position, two of each of the other statements, and related notes. An entity presents statements of financial position as at :
- the end of the current period,
- the end of the previous period (which is the same as the beginning of the current period), and
- the beginning of the earliest comparative period
Further, par. 41 stated that when the entity changes the presentation or classification of items in its financial statements, the entity shall reclassify comparative amounts unless reclassification is impracticable. When the entity reclassifies comparative amounts, the entity shall disclose :
- the nature of the reclassification;
- the amount of each item or class of items that is reclassified; and
- the reason for the reclassification.
- the reason for not reclassifying the amounts, and
- the nature of the adjustments that would have been made if the amounts had been reclassified.
Later, par. 44 stated that IAS 8 sets out the adjustments to comparative information required when an entity changes an accounting policy or corrects an error (Hrd) ***
Frequency of Reporting
In the previous post, we brought up the concept of frequency
of reporting on a given metric. We haven't talked much about this aspect of
trend analysis so far, despite the fact that it can be quite important. And it
interacts with another important topic we brought up in some previous posts: near
real time reporting.
We'll take a look briefly at frequency in this post, and give a brief look at near real time reporting in the next.
Error on the Side of Too Often.
Each important factor that you wish to measure will prove most useful in the end if you make a conscious choice to consider its frequency of measurement separately on the merits. My general operational rule is wherever possible to err on the side of measuring too often rather than not often enough.
Measurement vs. Reporting Frequency. When you measure at a relatively high frequency, it's possible later to report on the data at either the high collection frequency, or at a reduced frequency in order to smooth out the trend line pattern. On the other hand, if you don't measure frequently enough, you may miss out on short-lived quantum shifts in behavior that will be lost when reporting at longer intervals.
It's unfortunately not uncommon for vital indicators that are already being collected to have their frequency set so that measurements are too far apart.
Measuring Daily is Often a Good Starting Point. Let's take a specific example: the percentage of eligible children who attend primary school. Ideally, in my opinion, a metric such as this would be best if it were measured daily. There will be times when you will want to look at the day to day trend and see if any disruptive multi-day even has shown up. You may also want to understand any patterns that might be dependent on the day of the week. There will be other times when week by week reporting will be just right and still others when month by month will give the clearest view. Before you actually have the data, you cannot really know which reporting interval will prove most revealing.
My recommendations for the important Iraq metrics of the kind we have been scraping from the recent news reporting is that we make every effort to measure them with a frequency of once per day wherever that is possible.
When is Higher Frequency Helpful? There are some indicators where it would be advantageous to measure them even more frequently than once a day. For example, electricity delivery in Baghdad is a factor that I would like to measure minute by minute during the day and to do this both for the city as a whole as well as disaggregating these results by districts in the city and/or by individual power stations. Unless I get a very high resolution frequency, I won't be able to understand the frequency of or length or breadth of districts impacted by each outage. Such diagnostic capability is likely vital to figuring out where the est opportunities are for achieving higher levels of service and moving closer to fulfilling the desired demand.
Obstacles to High Frequency. On the other hand, there will be metrics such as the percentage of Iraqi members of Parliament who are living abroad where the obstacles to measuring may mean that we only get a read out on this indicator once a month. It might be nice to see how this varies day to day, but prove to be logistically impractical to get it.
Adjusting as you go along. There is no perfect frequency and there can likely be differences of opinion as to which frequency is best. The good news is that frequency can be adjusted as needed as we go along. The really important part is identifying all the important metrics and beginning the process to measure and record their values as they change over time.
We'll take a look briefly at frequency in this post, and give a brief look at near real time reporting in the next.
Error on the Side of Too Often.
Each important factor that you wish to measure will prove most useful in the end if you make a conscious choice to consider its frequency of measurement separately on the merits. My general operational rule is wherever possible to err on the side of measuring too often rather than not often enough.
Measurement vs. Reporting Frequency. When you measure at a relatively high frequency, it's possible later to report on the data at either the high collection frequency, or at a reduced frequency in order to smooth out the trend line pattern. On the other hand, if you don't measure frequently enough, you may miss out on short-lived quantum shifts in behavior that will be lost when reporting at longer intervals.
It's unfortunately not uncommon for vital indicators that are already being collected to have their frequency set so that measurements are too far apart.
Measuring Daily is Often a Good Starting Point. Let's take a specific example: the percentage of eligible children who attend primary school. Ideally, in my opinion, a metric such as this would be best if it were measured daily. There will be times when you will want to look at the day to day trend and see if any disruptive multi-day even has shown up. You may also want to understand any patterns that might be dependent on the day of the week. There will be other times when week by week reporting will be just right and still others when month by month will give the clearest view. Before you actually have the data, you cannot really know which reporting interval will prove most revealing.
My recommendations for the important Iraq metrics of the kind we have been scraping from the recent news reporting is that we make every effort to measure them with a frequency of once per day wherever that is possible.
When is Higher Frequency Helpful? There are some indicators where it would be advantageous to measure them even more frequently than once a day. For example, electricity delivery in Baghdad is a factor that I would like to measure minute by minute during the day and to do this both for the city as a whole as well as disaggregating these results by districts in the city and/or by individual power stations. Unless I get a very high resolution frequency, I won't be able to understand the frequency of or length or breadth of districts impacted by each outage. Such diagnostic capability is likely vital to figuring out where the est opportunities are for achieving higher levels of service and moving closer to fulfilling the desired demand.
Obstacles to High Frequency. On the other hand, there will be metrics such as the percentage of Iraqi members of Parliament who are living abroad where the obstacles to measuring may mean that we only get a read out on this indicator once a month. It might be nice to see how this varies day to day, but prove to be logistically impractical to get it.
Adjusting as you go along. There is no perfect frequency and there can likely be differences of opinion as to which frequency is best. The good news is that frequency can be adjusted as needed as we go along. The really important part is identifying all the important metrics and beginning the process to measure and record their values as they change over time.
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