Advanced Accounting
5-Step Approach
• IFRS 15:
1. Identify contract with customer, 2. Identify the separate performance obligations,
3. Determine transaction price, 4. Allocate the transaction price to the performance
obligation, 5. Recognise revenue when a performance obligation is satisfied
Accounting Theory
• looks at behaviour, needs and reasonings
• prescribes, predicts why and how, explains and looks at effectiveness
• 1920s-60s theories were based on observation
• Grady 1965: inductive approach
• PAT vs NAT
• there is no universally accepted theory of accounting or perspective about the role it has
Accounting Treatment
• holding gains/losses: financial capital maintenance perspective, physical capital
maintenance perspective
• consolidation, equity method, joint venture, at fair value
• assessing: what would change if another method was used? money moved from specific
places into other, where would it be reflected, gains/losses?
Acquisition Method
• all business combination should be accounted for under this method
• recognises that the acquirer gets net assets and their own are not affected by the
transition
• Incorporate sub’s revenues/expenses: line by line
• subtract: profit attributable to NCI
• incorporate sub’s assets/liabilities: line by line
• method:
1. Identify the acquirer
2. Determine the acquisition date
3. Recognize and measure the identifiable net assets acquired
4. Recognize and measure any “non-controlling interest”
5. Recognize and measure “goodwill” or gain from a bargain purchase (negative
goodwill)
Associates
• entity over which the investor has significant influence
• IAS 28: an invest. in an associate should be accounted for using the EM
• upstream/downstream transactions
Balance Sheet
• notes on credits and debits needed
, Ball and Brown
• 1968 paper: crucial to the acceptance of the positive research paradigm, they
investigated the stock market reaction to accounting earnings announcements
• findings: historical cost was useful to investors, 85-90% of earnings announcement is
anticipated by investors, found earnings announcements impacted share prices
Capital Market Research
• what it does: explores role of accounting in equity markets, sees how individuals or
groups react to accounting disclosures, examines stats relations, reacts if investors, no
share price change implies no reaction
• reasons for: info about earnings and components, earnings are oriented towards the
interests of shareholders, reliable data
• relies on EMH
• Ball Brown 1968: historical cost was useful to investors, 85-90% of earnings
announcement is anticipated by investors, found earnings announcements impacted
share prices
• info varies between countries and companies, Australian markets slower than US, less
alternative sources of info for smaller firms
• relation between unexpected changes in earnings (EPS) and magnitude of ab. returns
• earnings persistence depends on prop. of accruals relative to cash flows
• earnings announcements from firm A can results in ab. returns to firm B in the same
industry
• expected earnings as opposed to actual earnings
• voluntary disclosure: more disclosure leads to larger analyst following, more accurate
earnings forecast, increased investors following, reduction info asymmetry, reduced cost
of equity capital
• size: earnings announcements had more impact on the share prices of smaller firms
• Beaver, Lambert and Morse (1980)
• Dechow (1994)
Cash Flow Statement
Adjustments
cash flows from operating activities
start with profit before taxation
(plus) depreciation and amortisation expenses
(plus) interest expense/financial cost
increase (minus) or decrease (plus) in inventories
increase (minus) or decrease (plus) in trade receivables
increase (plus) or decrease (minus) in trade payables
gain (minus) or loss (plus) on disposal of non-current assets
cash generated from operating activities
(minus) interest paid
5-Step Approach
• IFRS 15:
1. Identify contract with customer, 2. Identify the separate performance obligations,
3. Determine transaction price, 4. Allocate the transaction price to the performance
obligation, 5. Recognise revenue when a performance obligation is satisfied
Accounting Theory
• looks at behaviour, needs and reasonings
• prescribes, predicts why and how, explains and looks at effectiveness
• 1920s-60s theories were based on observation
• Grady 1965: inductive approach
• PAT vs NAT
• there is no universally accepted theory of accounting or perspective about the role it has
Accounting Treatment
• holding gains/losses: financial capital maintenance perspective, physical capital
maintenance perspective
• consolidation, equity method, joint venture, at fair value
• assessing: what would change if another method was used? money moved from specific
places into other, where would it be reflected, gains/losses?
Acquisition Method
• all business combination should be accounted for under this method
• recognises that the acquirer gets net assets and their own are not affected by the
transition
• Incorporate sub’s revenues/expenses: line by line
• subtract: profit attributable to NCI
• incorporate sub’s assets/liabilities: line by line
• method:
1. Identify the acquirer
2. Determine the acquisition date
3. Recognize and measure the identifiable net assets acquired
4. Recognize and measure any “non-controlling interest”
5. Recognize and measure “goodwill” or gain from a bargain purchase (negative
goodwill)
Associates
• entity over which the investor has significant influence
• IAS 28: an invest. in an associate should be accounted for using the EM
• upstream/downstream transactions
Balance Sheet
• notes on credits and debits needed
, Ball and Brown
• 1968 paper: crucial to the acceptance of the positive research paradigm, they
investigated the stock market reaction to accounting earnings announcements
• findings: historical cost was useful to investors, 85-90% of earnings announcement is
anticipated by investors, found earnings announcements impacted share prices
Capital Market Research
• what it does: explores role of accounting in equity markets, sees how individuals or
groups react to accounting disclosures, examines stats relations, reacts if investors, no
share price change implies no reaction
• reasons for: info about earnings and components, earnings are oriented towards the
interests of shareholders, reliable data
• relies on EMH
• Ball Brown 1968: historical cost was useful to investors, 85-90% of earnings
announcement is anticipated by investors, found earnings announcements impacted
share prices
• info varies between countries and companies, Australian markets slower than US, less
alternative sources of info for smaller firms
• relation between unexpected changes in earnings (EPS) and magnitude of ab. returns
• earnings persistence depends on prop. of accruals relative to cash flows
• earnings announcements from firm A can results in ab. returns to firm B in the same
industry
• expected earnings as opposed to actual earnings
• voluntary disclosure: more disclosure leads to larger analyst following, more accurate
earnings forecast, increased investors following, reduction info asymmetry, reduced cost
of equity capital
• size: earnings announcements had more impact on the share prices of smaller firms
• Beaver, Lambert and Morse (1980)
• Dechow (1994)
Cash Flow Statement
Adjustments
cash flows from operating activities
start with profit before taxation
(plus) depreciation and amortisation expenses
(plus) interest expense/financial cost
increase (minus) or decrease (plus) in inventories
increase (minus) or decrease (plus) in trade receivables
increase (plus) or decrease (minus) in trade payables
gain (minus) or loss (plus) on disposal of non-current assets
cash generated from operating activities
(minus) interest paid
