a wall of orchids.. not china wall
What is FRP?
Essentially FRP is the processes, procedures and controls that the management rely on in doing the following tasks:-
- performing accounting period close
- preparing the financial statements
- reviewing and approving the financial statements
We need an understanding of how key judgements are made.
Why is understanding the FRP critical to Audit or to you, a newbie Accountant joining the management team in a new company?
- FRP is where management is more likely to manipulate the financial statements. It is often more difficult to manipulate routine transaction entries.
- FRP forms the foundation for other systems and processes within the company.
As a new management staff, while it may take some time before you get a complete feel of the decision process, it is also utmost critical that you get to know it soon. Why? You are responsible for all things big and small from the first day you start work in that office.
Events after the balance sheet date are those events, favourable and unfavourable, that occur between the balance sheet date and the date when the financial statements are authorised for issue.
Two types of events can be identified:
(a) those that provide evidence of conditions that existed at the balance sheet date (adjusting events after the balance sheet date); and
(b) those that are indicative of conditions that arose after the balance sheet date (non-adjusting events after the balance sheet date).
Things you got to know for FRS 10:-
- When are financial statements authorised for issue?
- Can you name some examples of adjusting events?
- Can you name some examples of non-adjusting events?
FRS 7 prescribes the principles in preparing cash flow statements.
The standard requires the provision of information about historical changes in cash and cash equivalents of a company by means of a cash flow statement that classifies cash flows during the period by operating, investing and financing activities.
Operating activities are the principal revenue-producing activities of the enterprise. Cash flows from operating activities are disclosed either using the:-
a) direct method (disclosure of major categories of gross cash receipts and payments); or
b) indirect method (profit or loss for the period is adjusted for non cash items (such as depreciation, foreign exchange losses etc.) and income or expense related items related to investing and financing activities to determine the operating cash flows.
Investing activities are those expenditures incurred with an intention to generate future income and cash flows.
Financing activities are those expenditures incurred that result in changes in the size and composition of the contributed equity and borrowings of the entity.
“Do you know the definition of “cash and cash equivalents”? Can you name some examples of cash equivalents?”, ask Edgar.
Source – ICPAS ePublication 22 November 2005 Issue 11/2005
of FRS 8 is to prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and correction of prior period errors.
Changes in accounting policies
An entity should change its accounting policies only if the change is required by the Standards or the change results in a more relevant and reliable information about the entities financial position. Any changes in accounting policies shall be accounted for in accordance with the specific transitional provisions of the Standards. If there are no specific transitional provisions, the change in accounting policies shall be done retrospectively as though the new accounting policy had always been applied.
Changes in accounting estimates
Changes in accounting estimates should be recognised prospectively in the profit and loss account either in the period of the change only or the period of change and future periods, if the changes affect both. Any corresponding changes in assets, liabilities or equity are recognised by making adjustments to the carrying amount of the assets, liabilities or equity in the period of change.
Material errors in financial statements that are discovered in subsequent periods must be adjusted retrospectively in the first set of financial statements authorized for issue after their discovery. The comparative amounts for prior period are either restated or if the error occurred before the earliest prior period presented, the opening balances of the assets, liabilities and equity for the earliest prior period are restated.
FRS 8 specifies that in instances where it is impracticable to do a retrospective adjustment for change in accounting policy, the entity should restate the comparative information prospectively from the earliest date practicable.
FRS 8 also specifies the disclosures required of changes in accounting policies, accounting estimates and errors.
What is prior period errors? When did an error occur?
Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that:-
- was available when financial statements for those periods were authorised for issue; and
- could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.
Source – ICPAS ePublication 29 Nov 2005 Issue 12/2005
FRS 2 provides guidance on the determination of cost of inventories and its subsequent recognition as an expense, any write down to net realizable value.
FRS 2 applies to all inventories except for:
a) WIP under construction contracts;
b) Financial instruments; and
c) Biological assets related to agricultural activity produce at the point of harvest.
Inventories are measured at the lower of cost and net realisable value (NRV).
- NRV is the estimated selling price in the ordinary course of business less estimated costs of completion and costs necessary to make the sale.
- Cost of inventories comprise of cost of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
Three methods of costing inventories are specified under paragraph 23-27 of FRS 2.
i) Specific identification of costs method
ii) First-In, First-Out (FIFO) costs method
iii) Weighted average costs method
FRS 2 requires that the amount of write down of inventories to NRV is recognised as an expense in the period the write down or loss occurs. Any reversals of the write down, as a result of increase in NRV, is recognised as a reduction in amount of inventories recognized as an expense in the period the reversal occurs.
FRS 2 also specifies the disclosures required of inventories.
Source – ICPAS ePublication
- To prescribe the basis of presentation of general purpose financial statements and;
- To ensure comparability of entity’s financial statements with previous periods and with other entities’ financial statements.
Below is a summary of the overall considerations for the presentation of financial statements.
- Fair presentation and compliance with FRS
A faithful representation of the effects of transactions, events and conditions in accordance with the FRS.
Preparation of financial statements with the assumption that the business will continue indefinitely.
- Accrual basis of accounting
A method where income and expense items are recognized and recorded when income is earned and expense is incurred, regardless of when cash is actually received or paid.
- Consistency of presentation
Presentation and classification of items in financial statements are retained from one period to the next unless the standard requires a change in presentation or there is a significant change in the nature of the entity’s operations, such that another presentation would be more appropriate.
- Materiality and aggregation
Similar items of each material class are to be presented separately.
No offsetting of asset and liabilities, and income and expenses unless permitted by a Standard.
To disclose comparative information of previous period for comparative purposes.
FRS 1 also specifies the minimum line item disclosure required on the face of the balance sheet, income statement, statement of changes in equity and notes to the financial statements except for presentation of cash flow statements which is covered under FRS 7.
FRS 1 also specifies that entities disclose information that is presented in the financial statements such as the accounting policies, judgments and key sources of estimation uncertainty at the balance sheet date.
Source – ICPAS ePublication 8 November 2005 Issue 9/2005
Under the new scheme,
There will be no more paper winners for F1 to F3. Instead a Certificate of Achievement will be awarded to students who have scored 85% and above in these papers. This is regardless of whether they took the paper-based or CBE exams.
MSER students will only be eligible for prizes from F4 to F9 and P1 to P7 when they transfer to the Professional Scheme.
P/S – So for those who have scored higher than 85%, please look out for your “Certificate of Achievement”. Cheers.