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.
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.
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
In some cases, narrative information provided in the financial statements
for the previous period(s) continues to be relevant in the current period. For
example, an entity discloses in the current period details of a legal dispute
whose outcome was uncertain at the end of the immediately preceding reporting
period and that is yet to be resolved. Users benefit from information that the
uncertainty existed at the end of the immediately preceding reporting period,
and about the steps that have been taken during the period to resolve the
uncertainty (IAS 1 par. 40).
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.
When it is impracticable to reclassify comparative amounts, an entity shall
disclose :
- the reason for not
reclassifying the amounts, and
- the nature of the adjustments
that would have been made if the amounts had been reclassified.
Enhancing the inter-period comparability of information assists users in
making economic decisions, especially by allowing the assessment of trends in
financial information for predictive purposes. In some circumstances, it is
impracticable to reclassify comparative information for a particular prior
period to achieve comparability with the current period. For example, an entity
may not have collected data in the prior period(s) in a way that allows
reclassification, and it may be impracticable to recreate the information (par.
43).
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.
