Current Issues in Financial Reporting

This article discusses the role and importance of the conceptual framework in financial reporting. It also provides answers to questions related to revenue recognition and intangible assets.

Running head: CURRENT ISSUES IN FINANCIAL REPORTING
Current Issues in Financial Reporting
Name of the Student:
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Author’s Note

1CURRENT ISSUES IN FINANCIAL REPORTING
Table of Contents
Answer to Question 1a.....................................................................................................................2
Answer to Question 1b....................................................................................................................4
Answer to Question 2......................................................................................................................5
Reference.......................................................................................................................................10

2CURRENT ISSUES IN FINANCIAL REPORTING
Answer to Question 1a
As per the case which is provided in the assessment, the management of Dynamics in
order to improve the overall sales of the business launched a promotion campaign which
included maintenance services. Due to such a campaign, the sales revenue of the business has
increased and the same is recognized as revenue for $ 4.4 million.
As per the provisions of IFRS 15, revenue of a business should be recognized on the
basis of a five-step model. The first step is identifying the contract which can be a single
contract, combined contract which consist of two or more contracts. The contract can also be
segmented in two or more contracts for revenue recognition purpose (Tong 2014). The second
step is to identify the performance obligation between the party and the performance obligation
of a contact should be distinct. The third step is determination of transaction price which is the
consideration for the promised goods or services provided by the business. The fourth step is
allocation of transaction price to different contract in case multiple performance obligation can
be identified by the business (Voulgaris, Stathopoulos and Walker 2014). In such a case, the
transaction price for each of the contract should be allocated accordingly to each performance
obligation of the business and the same is to be done on the basis of relative stand-alone selling
prices (Tsalavoutas and Dionysiou 2014). The last step involves recognition of revenue and the
same is done when the performance obligation for the contract is fulfilled.
In the case, the business of Dynamics ltd has sold goods in bulk with an offer of
maintenance services which is provided for 3 months while the contract is for 2 years ands
therefore the revenue for 3 months period will be recognized immediately which is $ 0.05
million while the remainder of the amount is treated as deferred revenue of the business. The

3CURRENT ISSUES IN FINANCIAL REPORTING
sales which is made by the business must be recognized immediately in the financial statements
as per the requirement of IFRS 15. The journal entry for the deferred revenue of the business and
the associated calculation for the same is shown below:
$m
Sale of goods ($5m x 80%) 4
Sale of services (3/24 x $0.5m x 80%) 0.05
Revenue to be recognised in year ended 31 December 2017 4.05
Deferred income should be measured at $0.35m (21/24 x $0.5m X 80%)
Revenue (retained earnings should therefore be reduced by $0.35m.
$m $m
Dr. Retained earnings 0.35
Cr. Deferred Income (CL and NCL) 0.35
The above calculation shows that the deferred revenue of the business and the same has
been recognised in the current year financial statement which would affect the total revenue of
the business and also the profitability of the business (Holzmann and Munter 2015). After
adjustment is made, the deferred revenue would be shown in the balance sheet and would be
considered as revenue of the business for next year. The revenue of the business would decrease
slightly after adjustment in the income statement of the business.

4CURRENT ISSUES IN FINANCIAL REPORTING
Answer to Question 1b
As per the case which is provided in the assessment, the business of Dynamics ltd
purchased a customer list from one of the liquidators of the business. The final price which was
paid was around $ 21 million and the same is based on the useful life of three years.
As per the provisions of IAS 38, an asset is to be recognized irrespective of whether the
same is created or purchased only if it is probable that the future economic benefits of the assets
would flow to the entity in future periods and the cost of the assets can be measured reliably. The
customer list which is purchased by the business satisfies the criteria specified by IAS 38 and
thee same can be considered to be an intangible asset as it is identifiable, non-monetary in nature
and does not have a physical existence (Iasplus.com. 2018). The customer list should be
capitalized at costs for $ 21 million and is also required to be amortized over the useful life of the
asset which is 3 years. The management has further tried to extend the useful life of the assets by
purchasing components from other businesses which cannot be considered a part of the
purchased assets as this is internally created by the management (Dinh et al. 2015). Therefore, it
can be said that the useful life of the customer acquired from liquidator would remain at 3 years
and the new additions would be considered as a part of the newly generated intangible assets of
the business and therefore should not be capitalized. The computation for amortization on
intangible assets and respective journal entry for the same is shown below:
$21m/3 x 10/12 months = $5.8m
$m $m
Dr. Retained earnings 5.8
Cr. Intangible assets 5.8

5CURRENT ISSUES IN FINANCIAL REPORTING
The carrying amount after deducting amortization should be carried forward. The
customer list of the management should be continued to be measured at historical costs as no
appropriate measure of the fair value of the business is not available to the business (Vetoshkina
and Tukhvatullin 2014). Therefore, the management needs to stick with the choice of accounting
policy of measuring the customer list with historical costs and any amendments made in the
policy might affect the gearing and returned on capital employed ratios of the business. The
amortization expenses of $ 5.8 million would be shown in the income statement of the business
while the carrying amount of the customer list will be shown in the balance sheet of the business.
Answer to Question 2
Introduction
The main purpose of this part is to understand the role and importance of the conceptual
framework which a business follows for the purpose of reporting financial information in the
annual reports of the business. The conceptual framework in accounting are set of rules and
guidelines which the accountants should follow while framing the financial statements of a
business and reporting about various requirements of a business (Macve 2015). The role of
conceptual framework in the overall accounting process is discussed briefly in the discussion
part.
Discussion
The accounting process is a systematic process which presents financial information and
performance of a business in front of the users. For such purpose professionals are required to
follow a reporting framework which systematically classifies material information of the
business and the present the same in such a way that they are easily interpretable. The conceptual

6CURRENT ISSUES IN FINANCIAL REPORTING
framework which is established by IASB provides such a framework to businesses for the
purpose of reporting significant financial information. The primary purpose of the conceptual
framework is to provide the IASB with a framework on the basis of which new accounting
standards can be developed as per the requirements of reporting and the same is also used by
accountants as guideline for preparing the annual reports of a business (Zhang and Andrew
2014). In addition to this, conceptual framework is also useful for developing an understanding
as to what is portrayed in the annual report of the business and take appropriate decisions on the
basis of the information which is shown in the annual report of the business.
The conceptual framework of a business contributes to the setting process of accounting
standards which are main foundation of the reporting of financial information. Therefore, it is
valid point that if a business can appropriately follow conceptual framework all current issues in
accounting process will get sorted. The mission of the accounting boards is to develop an
appropriate accounting standard which contributes to transparency and better presentation of
financial information and such is made possible with the help of conceptual framework of a
business. In time to time basis, the IASB bring about amendment in the conceptual framework of
the business with a view making improvement in the reporting process of the business. Some of
the recent upgrades which have brought about in the reporting framework of a business is related
to various concepts of measurements and basis on which measurement is done in the reporting
framework of a business.
Conceptual Framework plays a vital role in accounting as it is the basis on which
financial reports are prepared by accounting professionals. The main utility of conceptual
framework for the users is that it helps them to understand and interpret the financial information
and then take decisions regarding investment (Lewandowski 2016). In addition to this,

7CURRENT ISSUES IN FINANCIAL REPORTING
conceptual framework helps in promotion of harmonization principle for accounting standards.
In addition to this, the conceptual framework is developed in such a way that it can bring about
consistency in the reporting of financial information around the world. This would greatly
benefit the accounting professionals for following a unified approach in reporting of financial
information of a business.
The conceptual framework of a business was developed with a view point of helping the
users, investors and board of directors of the company in taking vital decisions for the business.
The conceptual framework presents the financial information in such a way that the users of the
annual reports can easily understand the reporting process (O’Riordan and Fairbrass 2014). The
conceptual framework of a business also takes into consideration the qualitative characteristics of
financial statement which is further classified as fundamental characteristics and enhancing
characteristics. Some of the characteristics which are identified are stated below in details:
 Relevance: The financial information which is presented in the annual report should be
relevant and should be such that the users of the financial statement can take appropriate
decisions from the same. Relevant information presented in the annual reports can make a
different in the decision-making process which is undertaken by the users (Bauer,
O'Brien and Saeed 2014). In addition to this, the information which are included in the
annual report should be material in nature which means that the information can affect
the annual reports of the business. Faithful Representation: The information which is shown in the annual report should be
faithfully represented. The information which is presented in the annual reports of the
business should of material and relevant and should not be misstated in any way. This

8CURRENT ISSUES IN FINANCIAL REPORTING
characteristic requires maintenance of quality of financial information presented in the
annual report of the business. Comparability: The information which is presented in the annual report of a business
must be comparable with previous year performance and also with performance of other
businesses in current year. This forms part of enhancing characteristics of financial
statement. Verifiability: The information which is presented in the annual report of the business
should be verifiable and this helps the users to appropriately establish whether the
financial information provided is faithfully presented or not. This feature allows the users
to be certain that the financial information presented in the annual report is appropriate or
not. Timeliness: The information which is presented in the annual report of the business
should be presented in a timely manner. This feature signifies that the financial
information should be available to the users of the annual report before decision making
process. Understandability: This principle states that the information which are included in the
annual report of the business should be presented in such a manner that the information is
easily understandable by the users and such can help in the decision-making process.
Thus, the above discussion shows that conceptual framework in accounting process requires
businesses to follow the above characteristics. The conceptual framework of a business helps in
bring about consistency and transparency in the reporting process.
Conclusion

9CURRENT ISSUES IN FINANCIAL REPORTING
The above analysis shows that conceptual framework in accounting is very important for
the purpose of enhancing the value of the financial statements but also for the purpose of helping
the users of the financial statement to effectively understand the financial information and
determine the performance of the business. The conceptual framework also brings about a
consistency in the reporting process and also plays a vital role in standard setting process of
IASB. Therefore, it can be said that the conceptual framework in financial reporting process can
effectively solve all current issues in accounting and further enhance the creditability of the
financial statements.

10CURRENT ISSUES IN FINANCIAL REPORTING
Reference
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comment on the IASB Conceptual Framework project. Accounting in Europe, 11(2), pp.211-217.
Dinh, T., Eierle, B., Schultze, W. and Steeger, L., 2015. Research and development, uncertainty,
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11CURRENT ISSUES IN FINANCIAL REPORTING
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