Free Accounting Dissertations - Select A Financial Accounting Measurement Or Disclosure Issue Regulated By
Title: Select a financial accounting measurement or disclosure issue regulated by an FRS and an IFRS. Compare and contrast the two standards with specific reference to the financial statement analysis implications of differences between them.
INTRODUCTION
The recent spurt in big accounting standards like Enron and WorldCom has once again brought cash into focus. Internet boom saw investors focusing on potential earnings with little reference to cash flows. The demise of larger companies and scale of manipulation in earnings has once again turned the tide in favour of cash flows.
Discounted cash flows models are the cornerstone of financial theory. Cash flows offer more credibility to valuation as they are more tangible than accrued earnings. ‘Historical cash flow information gives an indication of the relationship between profitability and cash-generating ability, and thus of the quality of the profit earned’ (Accounting Standards, 2004).
This paper compares and contrasts FRS 1 and IAS 7, the cash flow statement standards of UK’S ASB and International Accounting Standards respectively. A cash flow statement is required due to difference between the profit and loss statement and cash. It is useful in assessing the current liquidity and sources of funding of a business.
UK’s Accounting Standards Board (ASB) first promulgated FRS 1 in 1991 and subsequently revised it in 1996. The equivalent international accounting standard is IAS 7. There are many similarities between FRS 1 and IAS 7 and it is generally believed that IAS 7 influenced the formulation and subsequent revision of FRS 1. Both FRS 1 and IAS 7 are similar in the content of information they provide. They show the cash flow generated and utilised during the year.
Even though FRS 1 is similar to IAS 7, there are still some differences between them. These are mainly due to classification of cash and reporting formats.
Definition of cash
The main difference between FRS 1 and IAS 7 is in the definition of cash flows. ASB’s FRS defines cash flows to include movements in cash only. Cash is defined as cash in hand and deposits repayable on demand less overdrafts. IAS definition of cash flows is broader than that of FRS and IAS defines cash flows as movement in both cash and cash equivalents. Cash equivalents are short-term highly liquid investments that are easy to convert into cash and carry an insignificant risk of loss in value.
Under FRS 1, cash equivalents are included separately in the ‘management of liquid resources’. By clubbing together and showing separately the not so liquid cash equivalents, FRS cash flows standard is more conservative than IAS standards. If investors want a more conservative approach, they can quickly take out ‘management of liquid resources’ from cash flow statement.
On IAS 7 compliant cash flows statements, we would see more ‘cash’ than in FRS 1 compliant cash flow statements.
