The Primary Objective of FRS - Case Study Example

FRS 5 Table of Contents Table of Contents 2 Question 3 Executive Summary 3 Question 2 6 Question 3 8 References 10 Bibliography 11 Question 1 Executive Summary 1.1 Objective of FRS 5 The primary objective of FRS 5 is to ensure the substance of the transactions of an entity is also reported in its financial statement. It also considers the proper presentation and disclosure of the financial statement. The other objective of FRS 5 is to have faithful representation of the commercial effect of the transaction and the gains, losses, assets or liabilities in its financial statements (ASB, 1994). One of the most important things that have been ensured by the FRS 5 is to include the effective borrowings for an entity in the balance sheet as a liability even though it does not have any legal liability. 1.2 General Recognition and Measurement Principle It is not possible to record the transactions in a legal form basically for the complexities of the transactions. The principle of FRS says that legal characterisation of the transaction should not be affected. The principle of the FRS 5 can be discussed through two factors: Features of more complex Transactions The link between the transactions should be created as that the commercial effect can be made out, considering the entire series. It should be ensured that with the separation of legal title, exposure of the risk inherent in the benefits can also be possible. Inclusion of the option is also necessary. There are certain transactions, those are accompanied by an option instead of commitment to the original owner or to the owner to repurchase or to the buyer to resell. Assessing commercial effect by considering the position of other parties While assessing the commercial effect, it is important to consider the position of the related parties to it along with the motives of agreeing to its apparent expectation. It is important to have commercial logic to all of the related parties irrespective of whatever the substance of transaction is (ASB, 1994). Regarding the recognition of an item in the balance sheet, there are two conditions that it has to fulfil after meeting the definition of assets or liabilities. Those conditions are as follows: If there is an appropriate evidence of the benefit of future inflow or outflow along with the sufficient evidence of the existence of the item. The item should be measured by the monetary aspects along with sufficient reliability (ASB, 1994). 1.3 Presentation and Disclosure Basically, FRS 5 has two key paragraphs which indicate the disclosure required for the complex transactions. It has been mentioned in the paragraph 30 and 31. Both the points indicate the general requirements of the disclosure. According to those paragraphs: The disclosure of a transaction in the financial statement should be such and sufficient that the user of the financial statement will be able to understand the commercial effect. It is not necessary that the transactions should have an effect in the assets or the liabilities being recognized or ceasing to be recognized. A transaction has impact in the recognition of the assets or the liabilities. The nature of the transaction may be differing from the items included in the heading of the relevant balance sheet. In that case, the reason of the difference should be justified (Gee & Et. Al, 2004). Apart from these two points, another requirement of the disclosure is as follows. The assets and liabilities that has been resulted from straight forward transactions and those are from the more complex transactions are not necessary to be exactly the same. Requirement of the disclosure will increase with the greater difference. It has also been happening with few transactions that those are not recognized by any assets or liabilities. Those transactions also need proper disclosure to provide a true and fair view to the financial statement. Quasi subsidiaries also require disclosures, when there is more than one quasi-subsidiary that is integrated in the consolidated financial statements. As per the requirement of the company legislation, additional information and the effect of inclusion of the quasi-subsidiaries should be properly disclosed (ASB, 1994). Question 2 In order to understand any approach or any guideline, it is necessary to analyze it with the help of practical examples or illustrations. On this part of the report practical application of FRS 5 will be discussed which will further explain the effects of the FRS 5 in the complex transactions. Consignment Stock This arrangement mainly occurs in the industries where goods are manufactured by a company and are distributed to the customers through the small dealers. The legal condition between the dealer and the manufacturer is that whenever the dealer will find a customer for the good, ownership of the good will be delivered on that very moment, not before that. It refers that dealers do not posses any asset or stock legally. In this case, FRS 5 has recommended that in the books of the dealer, the assets will be recognized as assets on delivery. On the same time, corresponding liability towards the manufacturer should be included in creditors. Sale and Repurchase Agreements When a business needs to hold stock for a long time before selling it, then the business should opt for sale and repurchase agreement. The wine making company can be the good instance in this regard. In this case, the wine makers sell the wine to a finance company and make an agreement to buy the wine back after a fixed period and at a higher price. Here, the finance cost is equal to the selling price and the buying price. However if the transaction is charging an artificially low or high price, then it indicates that seller may have retained some of the benefits or risks inherent in the assets. It further refers that seller may have an effectual liability of a financing nature to the buyer. As per the rule, the higher part of the sale price can be considered as the provision of the loan taken by the buyer to the seller. Private Finance Initiative and Similar Contracts Under this contract, the services that have been traditionally provided by the public sector, that are being provided by the private sector. Hospitals and the educational establishments can be the example of this. Even few additional services can also be provided by the private service provider. Such as contract of catering or cleaning service. Here, the accounting issue is that whether the PFI contracts should consider assets or the liabilities for the public sector purchaser or to the private sector provider or for both. As per the required accounting of the PFI contacts under FRS 5, it should be decided at the beginning that how the payment has made by the purchaser. If the payment for the services and the property has made separately then it should be done through finding out the commercial substance. In that case, the payment for the property will be assessed with the provision of SSAP 21. Loan Transfer In case of loan transfer, it is required to understand that whether the transferor has kept hold of any of the rewards and risks of ownership of the loans or not. Question 3 As per the constitution of the Accounting Standards Committee Foundation (IASCF), the main objectives of the IASB are as follows: To develop a single set of understandable, enforceable and high quality global accounting standards To promote the rigorous application and use of those standards To take care of the special needs of the emerging economies For developing accounting standard as per the constitution, it is required to have transparent, high quality and comparable information not only in the financial statements but also in the financial reporting. Thus, it can enable the user to take economic decisions and can assist the participants in the world’s capital market. But all these factors are not perfectly taken care. It losses its materiality to the entity as it is unable to appreciate the requirement of the information on a country by country basis. Therefore, it lacks in providing comparable financial information to the users (Financial Task Force, 2010). International Accounting Standard Board is a committee which was established to serve the society at large and is a non- profit making organization. The IASB works with the National Accounting Setter Board to attain a union in accounting standards all over the world. International Accounting Standards Board (IASB) is the alone setter of high quality acceptable and enforceable accounting standards globally. It is developed for the public interest but to serve for public interest it requires clear, obvious and analogous information. The IASB also focuses in strengthening and reinforcing the authority structure so that they can keep proper account about the public issues and also about the financial stability (IASB, 2005). Thus, it can be concluded that even though the IASB has not yet issued a comparable accounting standard reporting the substance of transactions still it is at the heart of its accounting standards and other pronouncement. References ASB, 1994. Objective. Financial Reporting Standards 5. [Online] Available at: http://www.frc.org.uk/images/uploaded/documents/FRS%205.pdf [Accessed August 19, 2010]. Financial Task Force, 2010. User of Accounts. Correspondence. [Online] Available at: http://www.financialtaskforce.org/2010/07/14/letter-to-the-international-accounting-standards-board-iasb/ [Accessed August 19, 2010]. Gee, p. & Et. Al. Spicer And Peglers Financial Reporting For Business And Practice 2004. Gulf Professional Publishing, 2004. IASB, 2005. About the IASB structure. Commission Services Working Paper on Governance Developments In the IASB (International Accounting Standards Board) and IASCF (International Accounting Standards Committee Foundation). [Online] Available at: http://ec.europa.eu/internal_market/accounting/docs/ias/iasb_governance_report_working_paper_en.pdf [Accessed August 18, 2010]. Robins, P., 1999. Practical Applications of FRS 5. Substance of Transactions. [Online] Available at: http://www.accaglobal.com/archive/sa_oldarticles/30820 [Accessed August 19, 2010]. Bibliography Arner, D. W. Financial stability, economic growth, and the role of law. Cambridge University Press, 2007. Deloitte, 2004. IASB Publishes Thirteen “Improved” Standards. IAS Plus. [Online] Available at: http://www.iasplus.com/iasplus/uk0401improve.pdf [Accessed August 19, 2010]. Gee, P. UK GAAP for Business and Practice. Butterworth-Heinemann, 2006. ICAEW, 2006. Issues in financial reporting measurement. Information for Better Markets Measurement in Financial Reporting. [Online] Available at: http://www.icaew.com/index.cfm/route/142887/icaew_ga/pdf [Accessed August 13, 2010]. U.S. Securities and Exchange Commission, 2001. Overview of Disclosure Rules Application to Foreign Issue. Division of Corporation Finance International Financial Reporting and Disclosure Issues. . [Online] Available at: http://www.sec.gov/divisions/corpfin/internatl/issues0501.htm [Accessed August 19, 2010]. Read More