Accounting Conventions and Policies
1 Introduction
There are many accounting conventions and concepts underlying the preparation of financial statements.
In this chapter we will explain the main conventions and concepts,
2 The fundamental accounting concepts.
These are contained in IAS 1 Presentation of Financial Statements, and must be followed.
Fair presentation
Financial statements should be ‘fairly presented’
Going concern
It is assumed that a business will continue to operate for the foreseeable future.
Accruals
Assets, liabilities, equity, income and expenses are recognised when they occur, and not when cash is received or paid.
Consistency
Items should be treated in the same way from one period to the next, unless there is a significant change in the nature of the operations.
3 Other accounting concepts and qualitative characteristics
Materiality
Relevance
Reliability
Faithful Representation
Substance over form
Neutrality
Prudence
Completeness
Comparability
Understandability
4 Alternative Valuation Bases
Historical cost
Replacement cost
Net realisable value
Economic value
5 IFRS 15 Revenue from contracts with customers
This financial reporting statement defines when revenue should be recognised (i.e. at what date it should be regarded as having been earned). It is applicable to situations where revenue is received over a period - for example, a mobile phone operator supplying a phone and connection over a three year period.
To comply with IFRS 15, a company must follow five steps:
Step 1: Identify the contract with the customer
Step 2: Identify performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognise revenue as the company satisfies a performance obligation
To explain these steps, we will look at the following example:
Roger enters into a 12 month contract with Vite - his local mobile operator. The terms of the contract are that he will pay a monthly fixed fee of $50 and will receive a free handset at the start of the contract.
Vite sells the same handsets for $200 and the same monthly plans without a handset for $30 per month.
Calculate when the revenue will be recognised.
Show answerHide answer
6 IFRS 15 Prompt payment discount
IFRS 15 also deals with the way we account for discounts given to customers for prompt payment (we used to account for them differently).
When a sale is made to a customer and a prompt payment discount has been offered, the amount of revenue to be recognised will need to be estimated taking into account the probability of the discount being accepted. If we expect that the customer will accept the discount, then the revenue should be recorded net of the discount.
Reena sells goods with a list price of $5,000 on credit to a customer. Reena has offered the customer a 2% discount if payment is made within 10 days. Based on past experience, the customer is expected to take the discount.
Show how the sale and the payment will be recorded
if the customer does take the discount
if the customer does not pay within the 10 days
Show answerHide answer
Accounting Conventions and Policies
5 questionsAnswer the questions one at a time. Your progress is saved so you can leave and come back.
Open chapter practice