This - As spoken today, when we review balance sheet items, please keep in mind the core rule:
1. Assets – should not be overstated
2. Liabilities – should not be understated
This reflects the principle of prudence in financial reporting.
Note : The below outlines the key concepts and principles to guide our review of balance sheet items. It is important to note that this list is not exhaustive, and specific situations may require additional consideration based on the relevant accounting standards and judgement.
For assets, the treatment depends on how they are measured:
1. Historical Cost
2. - e.g. Investment in subsidiaries/associates (in separate FS), Property, Plant & Equipment (PPE)
3. - We assess for impairment in line with:
4. • FRS 36 (Impairment of Assets) – for PPE and cost-based investments
5. • FRS 27 (Separate Financial Statements) – allows cost method for investments in subsidiaries/associates
The carrying amount should not exceed the recoverable amount (i.e. higher of fair value less costs to sell and value in use).
2. Amortised cost
• e.g. Trade receivables, loan receivables
• We apply the Expected Credit Loss (ECL) model under FRS 109 (Financial Instruments), where this model considers past events, current conditions, and forward-looking information to recognise expected losses due to credit risk.
3. FVTPL
• e.g. Investment securities, derivatives
• No impairment required because the carrying amount is updated to fair value at each reporting date so the risk of overstatement in minimal and the changes are recognised directly in profit or loss under FRS 109 (Financial Instruments)
Note : FRS 113 (Fair Value Measurement), fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.On the other hand, for liabilities side:
• We must ensure that all present obligations (e.g. provisions, accruals) as of the reporting date are fully recognised in accordance with FRS 37 (Provisions, Contingent Liabilities and Contingent Assets)
This ensures we don’t understate what the company owes, especially for obligations that are probable and reliably measurable as of end of the reporting period.
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Welcome to our review of balance sheet principles. Today we'll explore the fundamental rules that guide financial reporting. The principle of prudence requires that assets should not be overstated and liabilities should not be understated. This conservative approach protects stakeholders by ensuring realistic financial positions.
Assets are measured using three primary methods. Historical cost applies to property, plant, equipment, and investments in subsidiaries, requiring impairment testing under FRS thirty-six. Amortised cost is used for trade and loan receivables, applying the Expected Credit Loss model under FRS one hundred nine. Fair Value Through Profit and Loss applies to investment securities and derivatives, with regular fair value updates under FRS one hundred nine and one hundred thirteen.
For impairment assessment, the carrying amount must not exceed the recoverable amount. The recoverable amount is the higher of fair value less costs to sell and value in use. For credit losses, the Expected Credit Loss model under FRS one hundred nine considers past events, current conditions, and forward-looking information to recognize expected losses due to credit risk.
For liabilities, we must ensure complete recognition of all present obligations as of the reporting date. FRS thirty-seven governs provisions, accruals, and contingent liabilities. The recognition criteria require that obligations are probable and reliably measurable. This comprehensive approach prevents understatement of what the company owes, ensuring stakeholders have a complete picture of the company's financial obligations.
To summarize our balance sheet review principles: The prudence principle requires conservative asset valuation and complete liability recognition. Assets are measured using three methods with appropriate testing. The Expected Credit Loss model provides comprehensive credit risk assessment. All present obligations must be recognized to prevent understatement. These principles ensure reliable financial reporting that protects stakeholder interests.