Financial statements furnish bits
of knowledge into an organization's health and fiscal status for a specific
time period. Fiscal financial statements are intended to furnish information to
the organization's shareholders, incorporating potential shareholders or
speculators. Consequently, these reports must furnish correct and applicable
information to empower decision making. Relevant component of financial
statements may as well hold enough information to help moguls in settling on
key monetary decisions for the business.
The International Accounting
Standards Board has made the International Financial Reporting Standards (IFRS)
to help achieve consistency in the models of standardized financial reporting.
This additionally helps guarantee consistency in the reports that are
processed. The IFRS illustrates how to state finance related transactions
inside a report, consequently making for a more standard arrangement, crosswise
over reports. The guidelines built by the IFRS make it simpler for financial
statements for be contemplated all around, without making disarray because of
diverse governs in distinctive nations.
Notwithstanding set norms being
followed in making financial statements, there are still mistakes that surface
and that can bargain the nature of a financial statements. These might be
identified with mistakes of oversight, or include matters, for example, long
haul obligation. Mistakes can likewise happen when managing data going with the
financial statements.
1. Mistakes of exclusion/omission
Now and again, reporting of expenses/cost may be
deficient, for instance, expenditures may be represented however expenses
included in raising subsidizes and incomes could get precluded in reporting.
This could apply to occasions too, where overhead expenses are not archived
legitimately or timesheets are not administered.
2. Cash and cash equivalent
It is known that statement of financial accounting
standards no. 95 para 8 defines the cash and cash equivalent for purposes of
this Statement, as short-term, highly liquid investments that are both: Readily
convertible to known amounts of cash and so near their maturity that they
present insignificant risk of changes in value because of changes in interest
rates. It continues while stating that generally, only those investments with
original maturities of three months or less qualify under that definition.
BUT the mistaken part found here that not all investments
that qualify are required to be treated as cash equivalents. Because here
enterprise should establish a policy concerning which short-term, highly liquid
investments that satisfy the definition of paragraph 8 may be treated as cash
equivalents. For example, as statement of financial accounting standards no. 95
illustrated that an enterprise having banking operations might decide that all
investments that qualify except for those purchased for its trading account
will be treated as cash equivalents, while an enterprise whose operations
consist largely of investing in short-term, highly liquid investments might
decide that all those items will be treated as investments rather than cash
equivalents. An enterprise shall disclose its policy for determining which
items are treated as cash equivalents. Any change to that policy is a change in
accounting principle that shall be effected by restating financial statements
for earlier years presented for comparative purposes.
3. Data going hand in hand with report:
When furnishing
data incorporating monetary archives, mind must be taken to guarantee that
corresponding references are available in the financial statements, also.
Illustrations of going with data can incorporate postings holding work plans,
accounts and liabilities.
4. Long term obligation disclosure:
Inappropriate
statement of long term obligation is a regular lapse found in the financial
statements. While the standard is that any long term obligation or borrowings
must be revealed, slips might incorporate fragmented disclosure or obligation
portions completely precluded out of human failure or through estimation
botches. Hence, inadequate disclosure may be made, or revelations are not made
whatsoever, bringing about budgetary reporting failures.
5. Related party disclosure
When there is a trade of cash included, there is related party disclosure
that is relevant. In any case, now and again, this may not be accounted for
properly. On occasion the sum or terms accompanied by both gatherings may not
be accurately revealed. This can bring about an error.
Who are related parties?
Para 9 of
IAS 24 defines a related party is a person or entity that is related to the
entity that is preparing its financial statements (referred to as the
'reporting entity').
a) A
person or a close member of that person's family is related to a reporting
entity if that person:
i)
has control or joint control over the reporting
entity;
ii) has
significant influence over the reporting entity; or
iii) is
a member of the key management personnel of the reporting entity or of a parent
of the reporting entity.
b) An
entity is related to a reporting entity if any of the following conditions
applies:
i)
The entity and the reporting entity are members
of the same group (which means that each parent, subsidiary and fellow
subsidiary is related to the others).
ii) One
entity is an associate or joint venture of the other entity (or an associate or
joint venture of a member of a group of which the other entity is a member).
iii) Both
entities are joint ventures of the same third party.
iv) One
entity is a joint venture of a third entity and the other entity is an
associate of the third entity.
v) The
entity is a post-employment defined benefit plan for the benefit of employees
of either the reporting entity or an entity related to the reporting entity. If
the reporting entity is itself such a plan, the sponsoring employers are also
related to the reporting entity.
vi) The
entity is controlled or jointly controlled by a person identified in (a).
vii) A
person identified in (a)(i) has significant influence over the entity or is a
member of the key management personnel of the entity (or of a parent of the
entity).
viii) The
entity, or any member of a group of which it is a part, provides key management
personnel services to the reporting entity or to the parent of the reporting
entity (It is the requirement added by
Annual Improvements to IFRSs 2010–2012 Cycle, effective for annual periods beginning
on or after 1 July 2014).
Para 11 of IAS 24 defines the following are deemed not to be related:
a) two
entities simply because they have a director or key manager in common
b) two
venturers who share joint control over a joint venture
c) providers
of finance, trade unions, public utilities, and departments and agencies of a
government that does not control, jointly control or significantly influence
the reporting entity, simply by virtue of their normal dealings with an entity
(even though they may affect the freedom of action of an entity or participate
in its decision-making process)
d) a
single customer, supplier, franchiser, distributor, or general agent with whom
an entity transacts a significant volume of business merely by virtue of the
resulting economic dependence
What are related party transactions?
As defined under para 9 of IAS 24
related party transaction is a transfer of resources, services, or obligations
between related parties, regardless of whether a price is charged.
Disclosure
As defined under para 16 of IAS 24 Relationships
between parents and subsidiaries. Regardless of whether there have been transactions
between a parent and a subsidiary, an entity must disclose the name of its
parent and, if different, the ultimate controlling party. If neither the
entity's parent nor the ultimate controlling party produces financial
statements available for public use, the name of the next most senior parent
that does so must also be disclosed.
Management compensation.
As defined under para 17 of IAS 24 Disclose
key management personnel compensation in total and for each of the following
categories:
-
short-term employee benefits
-
post-employment benefits
-
other long-term benefits
-
termination benefits
-
share-based payment benefits
-
Key management personnel are those persons
having authority and responsibility for planning, directing, and controlling
the activities of the entity, directly or indirectly, including any directors
(whether executive or otherwise) of the entity. [IAS 24.9]
As defined under para 17A and 18 A of
IAS 24 If an entity obtains key management personnel services from a management
entity, the entity is not required to disclose the compensation paid or payable
by the management entity to the management entity’s employees or directors.
Instead the entity discloses the amounts incurred by the entity for the
provision of key management personnel services that are provided by the
separate management entity (This requirements
were introduced by Annual Improvements to IFRSs 2010–2012 Cycle, effective for
annual periods beginning on or after 1 July 2014).
The point when planning financial statements for your
business, take note to keep away from the normal slips recorded previously.
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