(93)-CALCULATIONS FOR INCOMPLETE RECORDS

Calculations for Incomplete Records

In practice there should not be any missing item in the opening balance sheet of the business, because it should be available from the preparation of the previous year’s final accounts.

Credit sales and debtors

If business does not keep a record of its sales on credit, the value of these sales can be derived from the opening balance of trade debtors, the closing balance of trade debtors, and the payments received from the trade debtors during the period. Credit sales are:

Payments received from trade debtors -------------X
(+) Closing balance of trade debtors -----------------X
(-) Opening balance of trade debtors ----------------(X)
= Credit sales of the period -------------------------------X

Purchases and trade creditors

A similar relationship exists between purchases of stock during a period, the opening and closing balances for trade creditors, and amounts paid to trade creditors during the period.
If we wish to calculate an unknown amount for purchases, the amount would be derived as follows:

Payments to trade creditors ---------------------------X
(+) Closing balance of trade creditors -------------X
(-) Opening balance of trade creditors ------------(X)
= Purchases during the period -----------------------X

(92)-INCOMPLETE RECORDS ACCOUNTS

Incomplete Records Accounts

Incomplete records problems occur when a business does not have a full set of accounting records, either because:

• The proprietor of the business does not keep a full set of accounts
• Some of the business accounts are accidentally loss or destroyed

The problem for the accountant is to prepare a set of year end accounts for the business; i.e. a trading, profit and loss account, and a balance sheet. Since the business does not have a full set of records, preparing the final accounts is not a simple matter of closing off accounts and transferring balances. The task of preparing the final accounts involves:

• Establishing the cost of purchases and other expenses
• Establishing the total amount of sales
• Establishing the amount of creditors, accruals, debtors and prepayments at the end of the year

(91)-CONTINGENT ASSETS

Contingent Assets

Financial reporting standards define a contingent asset as:

A possible asset that arises from past events and whose existence will be confirmed by the occurrence of one or more uncertain future events not wholly within the entity’s control
A contingent asset must not be recognized. Only when the realization of the related economic benefits is virtually certain should recognition take place. At that point, the asset is no longer a contingent asset.

An entity should not recognize a contingent asset or liability but they should be disclosed by way of notice to the financial statements.

(90)-CONTINGENT LIABILITIES

Contingent Liabilities

Financial reporting standards define contingent liabilities as:

• A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the entity’s control; or
• A present obligation that arises from past events but is not recognized because, it is not probable that a transfer of economic benefits will be required to settle the obligation, or the amount of the obligation cannot be measured with sufficient reliability.

As a rule of thumb, probable means more than 50% likely. If an obligation is probable it is not a contingent liability-instead, a provision is needed.

Treatment of contingent liabilities

Contingent liabilities should not be recognized in financial statements but they should be disclosed. The required disclosures are:

• A brief description of the nature of the contingent liability
• An estimate of its financial effect
• An indication of the uncertainties that exist
• The possibility of any reimbursement

(89)-PROVISIONS FOR RESTRUCTURING

Provisions for Restructuring

Financial reporting standards define a restructuring as a Program me that is planned and is controlled by management and materially changes either:

• The scope of a business undertaken by an entity
• The manner in which that business is conducted.

The financial reporting standards give the following examples of events that may fall under the definition of restructuring.

• The sale or termination of a line of business
• The closure of business location in a country or region or the relocation of business activities from one country region to another
• Changes in management structure, for example, the elimination of a layer of management
• Fundamental reorganizations that have a material effect on the nature and focus of the entity’s operations

The question is whether or not an entity has obligation, legal or constructive at the balance sheet date.

• An entity must have a detailed formula plan for the restructuring.
• It must have raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.

Costs to be included within a restructuring prevision

The financial reporting standards state that a restructuring provision should include only the direct expenditures arising from the restructuring, which are those that are both:

• Necessary entailed by the restructuring
• Not associated with the ongoing activities of the entity.

The following costs should specifically not be included within a restructuring provision.

• Restructuring or relocating continuing staff
• Marketing
• Investment in new systems and distribution networks

(88)-PROVISIONS

Provisions

Financial statements must include all the information necessary for an understanding of the company’s financial position. Provisions, contingent liabilities and contingent assets are “uncertainties” that must be accounted for consistently if are to achieve this understanding.
Provisions

A provision is a liability of uncertain timing or amount.

A liability is an obligation of an entity to transfer economic benefits as a result of past transactions or events.

The financial reporting standard distinguishes provisions from other liabilities such as trade creditors and accruals. This is on the basis that for a provision there is uncertainty about the timing or amount of the future expenditure. Whilst uncertainty is clearly present in the case of certain accruals the uncertainty is generally must less than for provisions.

Financial reporting standard states that a provision should be recognized as a liability in the financial statements when,

• An entity has a present obligation as a result of a past event
• It is probable that a transfer of economic benefits will be required to settle the obligation
• A reliable estimate can be made of the obligation

Measure of Provisions

The amount recognized as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date. The estimates will be determined by the judgment of the entity’s management supplemented by the experience of similar transactions.

Allowance is made for uncertainty. Where the effect of the time value of money is material, the amount of a provision should be the present value of the expenditure required to settle the obligation. An appropriate discount rate should be used.

(87)-EVENTS AFTER THE BALANCE SHEET DATE

Events after the Balance Sheet Date

Non adjusting events

Non adjusting events those that are indicative of conditions that arose after the balance sheet date.

Consequently they do not result in changes in amounts in financial statements. They may, however, be of such materiality that their disclosure is required by way of notes to ensure that financial statements are not misleading.

A number of examples are given in financial reporting standards,

• Decline in market value of investments.
• Declaration of dividends after the balance sheet date, to be disclosed instead in the notes to the financial statements.

If non adjusting events are material, then disclosure is made in the notes to the accounts of:

• The nature of events,
• An estimate of its financial affect or a statement that such an estimate cannot be made.

The financial reporting standards give a number of examples of events after the balance sheet date needing disclosure.

• A major business combination after the balance sheet date or disposing of a major subsidiary.
• Announcing a plan to discontinue an operation.
• Major purchases and disposals of assets, or expropriation.
• The destruction of a major production plant by a fire.
• Announcing, or commencing the implementation of, a major restructuring.
• Major ordinary share transactions and potential ordinary share transactions.
• Abnormally large changes in asset prices or foreign exchange rates.
• Changes in tax rates, or tax laws enacted or announced, that have a significant affect on current and deferred tax assets and liabilities.
• Entering into significant commitments or contingent liabilities.
• Commencing major litigation arising solely out of events that occurred after the balance sheet date.