The statements of Accounting Standards (SAS) are issued by the Nigerian Accounting Standards Board (NASB) for use by all those interested in published financial statements either as preparers or users. The NASB is a thirteen member body comprising the following organisations and establishments: ¦ Central Bank of Nigeria (CBN) ¦ Corporate Affairs Commission (CAC) ¦ Federal Board of Inland Revenue (FBIR) ¦ Federal Ministry of Finance (FMF) ¦ Federal Ministry of Commerce and Tourism (FMCT) ¦ Nigerian Accounting Teachers’ Association (NATA) Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) ¦ Nigerian Deposit Insurance Corporation (NDIC) ¦ Nigerian Stock Exchange (NSE) ¦ Securities and Exchange Commission (SEC) ¦ The Chartered Institute of Bankers of Nigeria (CIBN) ¦ The Institute of Chartered Accountants of Nigeria (ICAN) ¦ The Office of the Auditor General for the Federation. Standards Issuing Procedure Prior to the issuing of any standard, a great deal of preparatory work is required which would culminate in the publication of an exposure draft.
Copies of the exposure draft are sent to members and those with a special interest in the topic. After full and proper consideration and consultation, if it is seen to be desirable, an accounting standard on the topic may then be issued. In Nigeria, the SAS has precedence over other foreign standards including International Accounting Standards (IAS). Each SAS however indicates the level of compliance with the relevant IAS. SAS 1 – DISCLOSURE OF ACCOUNTING POLICIES (Issued Nov 1984) The purpose of this statement is to assist any reader in the understanding and the nterpretation of financial statements and the information disclosed therein. Definitions Accounting method – is the medium through which accounting concepts are applied to financial transactions and to the preparation of financial statements. Accounting Basis – the totality of methods adopted by an enterprise for applying fundamental accounting concepts to its financial transactions. There are two distinctive accounting bases: i) Accrual basis; and ii) Cash basis. Accounting Policies – accounting policies are those bases, rules, principles, conventions and procedures adopted in preparing and presenting financial statements.
Accounting concepts identified by the standard are: Entity, going concern, periodicity, realisation, matching, consistency, and historical cost. Accounting principles are employed in applying accounting concepts are: substance over form, objectivity, fairness, materiality, and prudence. SAS 2 – INFORMATION TO BE DISCLOSED IN FINANCIAL STATEMENTS (Issued Nov 1984) This standard requires that financial statements should provide quantitative and qualitative information to aid users in making informed economic decisions.
Terms and meanings Accounting information – refers to the data that are found in financial statements. Accounting Period – refers to the time span, usually one year, covered by financial statements Financial Statement – consists of balance sheet, profit and loss account or income statement, notes on the account, cash flow statement, value added statement and historical financial summary. Long term – relates to a period in excess of 12 months. General Disclosures: The financial statements of an enterprise should state: ) The name of the enterprise b) The period of time covered c) A brief description of its activities d) Its legal form and e) Its relationship with its significant local and overseas suppliers including the immediate and ultimate parent, associated or affiliated company. SAS 3 ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT (Issued Nov 1984) This statement deals with accounting for property, plant and equipment under the historical cost concept and the revaluation of specific items of property, plant and equipment. Definitions
Property, Plant and Equipment – these are tangible assets that: a) have been acquired or constructed and held for use in the production or supply of goods and services and may include those held for maintenance or repair of such assets; and b) are not intended for sale in the ordinary course of business. Fair Value – is the amount for which an asset could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm’s length transaction. Net Book Value – is the amount (historical cost or valuation) at which an asset is carried in the books less related accumulated depreciation.
Useful Life – of an asset is the shorter of a) The predetermined physical life and b) The economic life during which it could be profitably employed in the operations of the enterprise. Recoverable Amount – is that part of the NBV of an item of property, plant and equipment that the enterprise can recover in the future through depreciation of the item including its net realisable value on disposal. SAS 4 – ON STOCKS (Issued March 1996) This statement deals with the valuation and preparation of items of stocks including livestock and agricultural produce.
Stocks include those finished goods and livestock awaiting sale, work-in-progress, raw materials and supplies to be consumed in the production of goods or the rendering of services. Livestock Two major problems are associated with the valuation of livestock, namely a) determining the actual number and their existence especially animals that graze; and b) identifying the various stages of their development The following three approaches to valuation of livestock are allowed by the standard: a. Cost approach b. Net realisable value . Appraisal value Systems of stock taking – two systems of stock taking generally in use are (i) Perpetual, and (ii) Periodic Valuation of stocks – generally, stocks should be valued at the lower of cost or net realisable value. The following methods are recommended by the standard: (a) First in, First out (b) Average cost, where it consistently approximates historical cost (c) Specific identification (d) Standard cost with the adjustment for cost variances, and (e) The adjusted selling price method (Retail Inventory Method)
The following stock valuation methods are not allowed: (a) latest Purchase Price (b) Last in, First out, and (c) Base stock. SAS 5 – ON CONSTRUCTION CONTRACTS (Issued August 1996) The main issues involved in accounting for construction contracts are the timing, measurement and recognition of revenue and the asset created during construction. Construction contract refers to the execution of building and civil engineering projects, mechanical and electrical engineering installations and other fabrications normally evidenced by an agreement between two or more parties.
In practice, two methods are generally used for accounting for construction contracts, namely: a) the completed contracts method, and b) the percentage-of-completion method Several types of contracts exist including: (i) fixed sum (lump sum) contract (ii) Cost-plus a fixed rate contract (iii) Re-measure contract (iv) Variable-Price contract SAS 6 – ON EXTRAORDINARY ITEMS AND PRIOR YEAR ADJUSTMENTS (Issued August 1986) The primary objectives of this statement are: a) to examine the issues involved in the determination of operating income in any given accounting period, and ) to prescribe the accounting treatment of extra ordinary and unusual items and prior year adjustments as well as their appropriate disclosure in financial statements. Definition: Exceptional Items – are those that though normal to the activity of an enterprise are abnormal as a result of their infrequency of occurrence and size e. g. abnormally high bad debts. Extraordinary items – are those that occur outside the ordinary activities of an enterprise and are not expected to recur frequently.
Prior year adjustments – are items of revenue and expenses that were recorded this year but would have been recorded in a prior year or years if all the facts had been known at that time. These do not include adjustments for differences between actual and accounting estimates. Ordinary activities – of an enterprise are normal product lines or day-to-day activities. There are two types of reporting concepts namely, • Current-Operating-Performance concepts, and • All-Inclusive concepts A reporting entity should adopt the All-Inclusive Concept of reporting.
SAS 7 – ON FOREIGN CURRENCY CONVERSIONS AND TRANSLATIONS (Issued June 1988) The primary objectives of this statement are to provide uniform accounting treatment for: a) Foreign exchange transactions and b) The translation by a Nigerian enterprise of the financial statements of its foreign branches, subsidiaries, associates, or joint ventures based in a country other than Nigeria. Definitions Foreign Currency – is any currency other than the domestic currency, the Naira. Conversion – is the process of expressing a foreign currency amount in naira by the use of an appropriate rate of exchange.
Translation – is the restating of accounting balances of foreign operations at their equivalents in naira. Exchange Rate – is the rate at which the currency of a country is exchanged for the currency of another country. Some exchange rates used in practice are: i) Official Exchange ii) Spot rate iii) Closing rate of exchange iv) Forward rate Translation of the accounts of foreign operations Three main methods of translating foreign account balances are: (i) closing rate method, (ii) temporal method, and (iii) Monetary, Non-monetary method
SAS 8 – ON ACCOUNTING FOR EMPLOYEES’ RETIREMENT BENEFITS (issued June 1990) The primary objectives of this statement are to narrow the differences in the methods or manner used in a) measuring the amount of retirement obligations under retirement benefit plans, b) allocating the cost of the plan and recognising resulting gains or losses to the accounting periods, and c) disclosing as accurately as possible, the plan and the effects of the plan implementation on the reporting enterprise. Retirement benefits can be determined in either of two ways, namely; ¦ as a function of years of service and earnings as a function of accumulated contributions Retirement costs are determined using Actuarial cost methods namely: i) accrued benefit cost method, ii) projected benefit cost method Actuarial gains or losses are recognised in practice in either of 3 ways viz: i) immediate recognition ii) spreading iii) averaging SAS 9 ACCOUNTING FOR DEPRECIATION (Issued Aug 1989) This statement provides a guide for uniform and acceptable methods of determining and reporting depreciation on items of property, plant and equipment whether stated at historical cost or revalued amounts.
Depreciation – represents an estimate of the portion of the historical cost or revalued amount of a fixed asset chargeable to operations during an accounting period. Methods for Calculating Depreciation Methods based on passage of time include: (a) straight line (b) decreasing charge (i) sum-of-the-year-digit (ii) Reducing balance (c) annuity and sinking fund Methods based on the level of usage or output are a) service hour, and b) productive output SAS 10 – ACCOUNTING BY BANKS AND NONBANK FINANCIAL INSTITUTIONS (PART 1) (Issued October 1990)
This statement focuses on three main areas of concern relating to accounting practices followed by banks, namely; • Income recognition • Loss recognition, and • Balance sheet classification Income Statement – Each principal revenue item should be stated separately in a bank’s financial statements to enable the user assess the contribution of that particular source of revenue. Balance Sheet – a bank should group its assets and liabilities in the balance sheet according to their nature and list them in order of their liquidity and maturity. SAS 11 – ON LEASES (Issued March 1991) The primary objectives of this statement are: a) to ensure that published financial statements contain sufficient information about lease transactions to make it possible for users of such statements to determine the effects of lease commitments on the present and future operations of the reporting enterprises. (b) To ensure uniform disclosure of terms and classes of leases in financial statements. A lease is a contractual agreement between an owner (the lessor) and another party (the lessee) which conveys to the lessee the right to use the leased asset for an agreed period of time in return for a consideration, usually periodic payment called rents. Classification of Leases ) Operating lease ii) Finance or capital lease Other variants of finance or capital leases are: a) Leveraged lease b) Sales-tyoe lease c) Direct finance lease SAS 12 – ON ACCOUNTING FOR DEFERRED TAXES (Superseded by SAS 19 – Accounting for Taxes) SAS 13 – ON ACCOUNTING FOR INVESTMENTS (Issued Nov 1992) The statement focuses on three main forms of investments, namely (a) Short-term investment (b) Long-term investments, and (c) Investment properties Investments are assets acquired by an enterprise for purposes of capital appreciation or income generation without any activities in the form of production, trade, or provision of services.
Valuation Short-term investments should be valued at the lower of cost and market value. Long-term investments should be carried at cost or at a revalued amount Investment properties should be carried in the balance sheet at their market value and revalued periodically an a systematic basis at least once in every three years SAS 14 – ACCOUNTING IN THE PETROLEUM INDUSTRY: UPSTREAM ACTIVITIES (Issued Dec 1993) This statement deals with accounting and reporting for upstream activities. It does not cover the downstream activities.
Upstream activities involve the acquisition of mineral interest in properties, exploration (including prospecting) development, and production of crude oil and gas. Oil and gas producing activities involve costs which may be classified as: (a) mineral right acquisition costs (b) exploration and drilling costs (c) development costs (d) production costs (e) support equipment and facilities costs, and (f) general costs Oil and Gas Accounting Methods Two basic accounting methods in common use are the Full cost and the Successful Efforts methods.
A third method known as Reserve Recognition Accounting (RRA) allows an enterprise to recognise the value of proved oil and gas reserves as assets and changes in such reserve values as earnings in the Financial Statements. This method is however not in common use and is not recommended. SAS 15 – ON ACCOUNTING BY BANKS AND NONBANK FINANCIAL INSTITUTIONS (PART II) (Issued Dec 1996) This statement seeks to provide a guide for accounting policies and accounting methods that are to be followed by non bank financial institutions as: Finance Houses/Companies ¦ Bureaux De Change ¦ Mortgage Institutions ¦ Discount Houses ¦ Stock Brokerage Firms ; and ¦ Other Capital Market Operators SAS 16 – ACCOUNTING FOR INSURANCE BUSINESS (Issued Dec 1997) This statement establishes financial accounting and reporting standards for the financial statements of nonlife and life assurance undertakings. The business of insurance can be broadly divided into two categories: (a) General Insurance Business (non life) (b) Life Assurance Business (long term business)
Basis of accounting for Insurance transaction include: ¦ Annual Accounting ¦ Deferred Annual accounting, and ¦ Fund accounting General insurers are required to adopt the annual basis of accounting. Where it is not possible to determine underwriting results with reasonable certainty until the following accounting period, the deferred annual basis should be adopted. Life assurance business should be accounted for on the fund accounting basis. Balance sheet – both general insurers and life assurers should arrange their balance sheet items in order of liquidity.
SAS 17 – ACCOUNTING IN THE PETROLEUM INDUSTRY: DOWNSTREAM ACTIVITIES (issued Dec 1997) This statement provides guide on accounting practices and reporting formats to be followed by companies operating in the downstream sector of the Nigerian Petroleum Industry. Downstream activities involve transporting, refining and marketing of oil, gas and derivatives. Such companies include those engaged in: ¦ Refining and petrochemicals ¦ Marketing and distribution; and ¦ Liquefied Natural Gas SAS 18 – ON STATEMENT OF CASH FLOWS (Issued Dec 1997)
This standard requires that a statement of cash flows should be part of the financial statements prepared by an organisation. It replaces the statement of source and application of funds required by SAS 2. Definitions Cash – comprises cash in hand and demand deposits, denominated in Naira and foreign currencies. Cash Equivalents – are short term, highly liquid investments that are readily convertible to known amount of cash and which are subject to an insignificant risk of changes in value. Generally, they are within three months of maturity. Cash flows – are inflows and outflows of cash equivalents
There are two methods of preparing a statement of cash flows: 1) Direct method; and 2) Indirect method Classification of cash flows The standard requires that cash flow items be classified under the following headings: ¦ Operating activities ¦ Investing activities; and ¦ Financing activities. Interest paid, dividend paid and other distributions to owners should be classified as cash flows from financing activities while interest received and dividend received should be classified as cash flows from investing activities except where the investor-company has significant control over he investee company and holds at least 20% of the equity. In such cases, dividends received should be classified as cash flows from operating activities. SAS 19 Accounting for Taxes (Issued December 2000) This Statement replaces the Statement of Accounting Standard No. 12. SAS 19 – Accounting for Taxes covers taxes on business organisations including Companies Income Tax, Petroleum Profit Tax, Capital Gains Tax, Value Added Tax and Education Tax. The Statement does not cover Customs and Excise Duties and Royalties. Key Definitions Deferred Tax is the tax (liability or asset) attributable to timing differences.
Input Tax (VAT) is the tax paid on goods and services purchased. Output Tax (VAT) is the tax collected by a taxable person from other parties for goods and services supplied. Permanent Differences are differences between taxable and accounting income, for a period, that are not expected to reverse in subsequent periods. Tax Expense/Tax Income is the total of current and deferred taxes charged against or credited to the income of the accounting period. Temporary Differences are the differences between the amount an asset or a liability is carried in the balance sheet and its tax base.
Timing Differences are differences between the accounting income and taxable income which arise because the periods in which some items of revenue and expense are included in accounting income differ from the periods in which they are included in taxable income. Such differences originate in one period and are expected to reverse in one or other subsequent periods. Bases of providing for deferred taxes – nil provision basis; – partial provision basis; and – full provision basis. Methods of computing Deferred tax – deferral method (FIFO or Average) – liability method Presentation in financial statements
There are two major methods of presenting tax effects of timing differences in the financial statements: – net-of-tax method (prohibited) – separate line item method (permitted) Investment income should be accounted for at gross amounts and the tax withheld at source should be deducted from the tax payable. Deferred taxes should be computed using the liability method Only the timing differences that are expected to reverse during the period allowed by the tax law should be considered in computing deferred taxes for treatment either as an asset or as a charge to the deferred tax account.
Full provision should be made for deferred taxes. Deferred taxes relating to ordinary activities should be shown as part of the tax on profit or loss resulting from ordinary activities. Deferred taxes relating to extraordinary items should be shown as part of the tax on extraordinary items. Capital gains tax should be included in the tax expense for the period. Where capital gains tax relates to a disposal treated as an extraordinary item, it should be stated as a deduction from the item. Where non-recoverable VAT in respect of an expense item should be expensed.
Where a non-recoverable VAT is paid in respect of an item of fixed asset, the VAT should be capitalised as part of the cost of the fixed asset. The net amount owing to or due from the tax authority should form part of debtors or creditors. Where recoverable VAT remains consistently outstanding for three years, it should be fully provided for. Output VAT should be excluded from the turnover shown in the profit and loss account. Disclosure Requirements The following components of tax expense (income) should be disclosed by way of notes: – Company income tax; – Petroleum profit tax; Capital gains tax; – Education tax; and – Deferred tax. Taxes on extraordinary items and prior year adjustments Deferred tax balance should be presented in the balance sheet separately in the case of liability, between long term and current liabilities and in case of assets, between fixed and current assets. Movements in tax accounts should be shown as follows: Current Taxes – balance at the beginning of the period; – tax charge or credit for the period; – payments made during the period; – tax credits received during the period; and – balance at the end of the period.
Deferred taxes – balance at the beginning of the period; – current year provision (reversal); and – balance at the end of the period. TUTORIAL NOTE ON DEFERRED TAXATION – SAS 19 & IAS 12 (Revised) Background The amount of tax payable in any particular period does not necessarily bear a direct relationship to the amount of profit or loss shown on the income statement. This is because the tax laws provide for the computation of the taxable income for a period based on rules different from the generally accepted accounting principles followed while preparing the income statement.
In order to account for the tax effects of all transactions occurring within a period, a deferred tax asset or liability (as appropriate) is usually recognise. This is in line with the matching concept. Key Terms Deferred Tax Liabilities are the taxes payable in future accounting periods attributable to timing differences. Permanent Differences are differences between taxable and accounting income, for a period, that are not expected to reverse in subsequent periods. Tax Expense/Tax Income is the total of current and deferred taxes charged against or credited to the income of the accounting period.
Temporary Differences are the differences between the amount an asset or a liability is carried in the balance sheet and its tax base. Temporary differences may be either taxable differences or deductible differences. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. Timing Differences are differences between the accounting income and taxable income which arise because the periods in which some items of revenue and expense are included in accounting income differ from the periods in which they are included in taxable income.
Such differences originate in one period and are expected to reverse in one or other subsequent periods. While all timing differences are temporary differences, not all temporary differences are timing differences. Bases of Providing for Deferred Taxes The objective of providing for deferred taxes is to ensure that the tax expense reported in an income statement of a particular period reflects the tax effects of transactions included in the accounting profit/loss of the period. Permanent differences are not taken into consideration as they do not affect other periods.
In providing for deferred taxes, three major bases are commonly in use. These are: – nil provision basis; – partial provision basis; and – full provision basis. Under the nil provision basis, the tax effects of timing differences are ignored completely. Only the tax payable in respect of the accounting period is charged to income in that period and no provision is made for deferred taxes. Proponents of this basis hold the view that since tax liability arises only on taxable income and not on accounting income, there is no need to provide for deferred taxes.
However, this practice is not recommended because it could understate or overstate the tax expense for the period. Under the partial provision basis, the tax effects of some timing differences are excluded from the computation of deferred taxes when there is reasonable evidence that those timing differences will not reverse for some considerable number of years. Supporters of this basis argue that deferred tax has to be provided for only where there is a high probability that the tax will become payable as a result of the reversal of timing differences. Opponents of this basis argue that the current deferred taxes will reverse.
It may only be replaced by other originating differences in future. This practice is also not recommended because the amount of the provision is subjective. The full provision basis takes into account all the timing differences. Proponents of this basis submit that financial statements of a particular period are expected to recognise the tax effects of all the transactions occurring in that period. Opponents of this basis argue that there is the problem as to whether, and why, distant and contingent possibilities of paying greater tax in the future should be recognised now as liabilities in the account.
This practice is prudent and acceptable internationally and is the basis required by SAS 19. Methods of Computation The tax effect of a timing difference is computed as the difference between the tax computed after taking into account the transaction(s) giving rise to the timing difference and the tax computed without including such transaction(s). There are two methods of computing deferred taxes: – deferral method – liability method Deferral Method Under this method, deferred taxes are determine on the basis of the prevailing tax rates when the timing differences originate.
No adjustments are made later to recognise subsequent changes in tax rates. Reversals of the tax effects of timing differences are accounted for using the tax rates current at the time the differences arose. In practice, the rates used may be either an average rate to date, or a rate determined through the first-in-first-first-out approach. A basic argument against the deferral method is that the balance of deferred taxes may not represent the actual amount of additional taxes payable or recoverable in the periods that timing differences reverse. Liability method
Under this method, the amount of deferred tax is computed using the tax rate expected to be in force during the period in which the timing differences reverse. Usually, the current tax rate is used as a reasonable estimate of the future tax rates, unless changes in tax rates are known in advance. As a result, the deferred tax provision represents the best estimate of the amount which would be payable or recoverable if the relevant timing differences reverse. Thus, the difference between income tax expense and income tax payable for the period is directly adjusted on the deferred tax balance.
When accounting for timing differences results in a debit balance, and there is reasonable expectation of its recovery, it is usually carried forward as an asset. Presentation in Financial Statements There are two major methods of presenting tax effects of timing differences in the financial statements: – net-of-tax method – separate line item method Net-of-Tax-Method Under this method, the tax effects of timing differences (determined by either the deferral or liability method) are not reported separately; instead, they are reported as adjustments to the carrying amounts of specific assets or liabilities and the related revenues or expenses.
Although this method recognises that the values of assets and liabilities are affected by tax considerations, it fails to distinguish between transactions and their tax effects and thus it is not recommended. Separate Line Item Method Under this method, the tax effects in the financial statements are shown separately from the items or transactions to which they relate. The main advantage of this method is that it distinguishes between an item and its tax effects. Disclosure Requirements The major components of tax expense or income shall be disclosed separately ¦ the amount of deferred tax expense (income) relating to the origination and reversal of temporary differences ¦ the amount of a deferred tax asset and the nature of the evidence supporting its recognition ¦ an explanation of changes in the applicable tax rate(s) compared to the previous accounting period ¦ an explanation of the relationship between tax expense (income) and accounting profit (i. e. econciliation of effective to statutory tax rate) ¦ the aggregate current and deferred tax relating to items that are charged or credited to equity ¦ the amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new taxes DEFERRED TAXES – Points to Note ¦ Deferred taxes should be computed using the liability method ¦ Only the timing differences that are expected to reverse during the period allowed by the tax law should be considered in computing deferred taxes for treatment either as an asset or as a charge to the deferred tax account. ¦ Full provision should be made for deferred taxes (Full basis). Deferred taxes relating to ordinary activities should be shown as part of the tax on profit or loss resulting from ordinary activities. ¦ Deferred taxes relating to extraordinary items should be shown as part of the tax on extraordinary items. ¦ Deferred taxes, other than those relating to extraordinary items or prior year adjustments, should be shown separately from the items or transaction to which they relate. ¦ Deferred tax balance should be presented in the balance sheet separately in the case of liability, between long term and current liabilities and in case of assets, between fixed and current assets.
The tax effect relating to the increase in the carrying value of a revalued asset should be determined and charged or credited directly to equity. SAS 20: Abridged Financial Statements (Issued Dec 2001) The primary objectives of this Statement are to: – specify the minimum contents of Abridged Financial Statements; – standardise formats for presentation of Abridged Financial Statements; and – improve comparability and usefulness of Abridged Financial Statements. Abridged Financial Statements should carry a declaration that: a) they are abridged financial statements; ) the financial statements and the specific disclosures included in them have been derived from the full financial statements of the company; c) the abridged financial statements cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of the organisation as the full financial statements; and d) copies of the full financial statements can be obtained from the Registrars of the company. A company whose financial statements for a period are qualified by its auditors should not publish Abridged Financial Statements for that period.
Abridged Financial Statements must include the following as in the full financial statements: a) accounting policies; b) profit and loss account for the financial year; c) balance sheet as at the end of the financial year; d) statement of cash flows for the financial year; e) notes in relation to exceptional and extraordinary items; f) five-year financial summary; and g) any other information necessary to ensure that the abridged financial statements are consistent with the full accounts and reports for the year.
Other information to be included in an abridged financial statements are: a) Notice of Annual General Meeting; b) Names of Directors during the year and their shareholdings; c) Report of the Audit committee which should confirm that the auditors report is unqualified; d) Financial highlights (Result at a glance); and e) Dividends paid or proposed and dates of payment. Disclosure ¦ Material events occurring after the balance sheet date; and ¦ Where there is a change in accounting policy or estimates ¦ Information for the receding corresponding financial year SAS 21 – On Earnings Per Share (Issued March 2002) Earnings Per Share (EPS) refers to earnings per ordinary share. The objective of the standard is to prescribe the method of calculating and disclosure of basic and diluted EPS and other related information. Key Definitions Adjusted Earnings Per Share – Refers to the figure carried in a financial statement as EPS for previous years after recalculating the EPS of such years using the outstanding shares of the company as at the latest Balance Sheet date as a common denominator for all the years.
Basic Earnings Per Share – Basic earning per share is the amount of earnings per share based on the weighted average number of shares outstanding during the reporting period. Diluted Earnings Per Share – diluted earnings per share is the amount of earnings per share after adjusting for the effect of all potential ordinary shares. An option is the right to deal in the security of an entity at a fixed price during a specific period of time. An option can either be a call option or a put option. ¦ A call option is a right given by one party to another to buy a security at a fixed price during a specific period of time. A put option is a right given by one party to another to sell a security at a fixed price during a specific period of time. A warrant is a certificate by a company which gives its holder the right to purchase its shares at a fixed price within a specified period of time. Summary of the provisions of the standard In calculating EPS, an enterprise should not include extraordinary items before arriving at profit after tax. Potential ordinary shares should be treated as dilutive when, and only when, their conversion to ordinary shares would decrease net profit per share from continuing ordinary operations.
A weighted average number of shares outstanding during the period should be used as a denominator for the earnings per share calculation. Shares issued during the year included in the weighted average number of shares should reflect the date the consideration was received. In calculating diluted earnings per share, the number of shares should be determined as the total of the following: a. the weighted average number of ordinary shares. b. Potential ordinary shares of the entity outstanding as at the beginning of the financial year, that remain outstanding as at the reporting date, that are dilutive. . Potential ordinary shares issued during the financial year that are dilutive, weighted by reference to the number of days from the date of issue of those potential ordinary shares to the reporting date as a proportion of the total number of days in the financial year. d. Potential ordinary shares outstanding during the financial year that are dilutive and have been converted or have lapsed or been cancelled during the financial year, weighted by reference to the numbers of days from the beginning of the financial year to the date of conversion, lapse or cancellation.
The computation of convertible potential ordinary shares that are dilutive should assume the most advantageous conversion rate or exercise price from the standpoint of the holder of the potential ordinary shares. The weighted average number of ordinary shares outstanding during the period and for the immediate preceding year should be adjusted only when ordinary shares outstanding is increased or reduced without a corresponding change in resources. Disclosure requirements An enterprise should present basic and diluted earnings per share on the face of the income statement, and the historical financial summary with equal prominence.
An enterprise should present basic and diluted earnings per share, even if the amounts disclosed are negative (a loss per share). An enterprise should present basic and diluted earnings per share statistics for earnings per share before extraordinary items. An enterprise should disclose the following: ¦ the amounts used as the numerators in calculating basic and diluted earnings per share, and a reconciliation of those amounts to the net profit or loss for the period. ¦ Disclose any changes in the number of shares used to compute earnings per share. The financial effect on diluted earnings per share of any adjustment resulting from changes in accounting policy applied in preparing and presenting the financial report. ¦ Any conversion to, calling of, or subscription for, ordinary shares that occurs between the reporting date and the time of completion of the financial report. An enterprise should disclose, by way of notes, ordinary share or potential ordinary share transactions that occur after the balance sheet date when they are of such importance that non-disclosure would affect the ability of the users of the financial statements to make proper evaluations and decisions.
SAS 22 – ACCOUNTING FOR RESEARCH AND DEVELOPMENT COSTS The statement applies to all enterprises that engage in R&D activities whether for product or service development. Key definitions Research is a systematic investigation undertaken with the hope of gaining new scientific or technical knowledge and understanding. Basic research are the efforts that seek to gain more comprehensive knowledge or understanding of the subject under study, without specific applications or commercial objectives in mind.
Applied research is the inquiry aimed at gaining the knowledge or understanding to meet a specific, recognised need of a practical nature, especially to achieve specific commercial objectives with respect to products, processes or services Development is the systematic use of the knowledge or understanding gained from research to create or improve useful materials, devices, systems or methods through building and operating prototypes or test models. Components of R&D costs These include the following utilised in R&D activities: ¦ materials and services costs ¦ salaries and wages costs of assets constructed or acquired specifically for R&D ¦ depreciation charge for R&D assets ¦ amrotisation of patents and licence related to R&D There are 2 major ways of treating R&D, they are write-off and deferral methods SAS 22 requires R&D costs to be separated into (a) research costs and (b) development costs The amount of research cost should be expensed in the period in which they are incurred while development costs may be deferred if the following criteria are met: ¦ Clearly defined product or process with identifiable costs ¦ Technical feasibility Intention to produce and market, or use the product or process ¦ Ability to complete the project and market the product or process ¦ Current and future costs to be deferred are material and are expected beyond reasonable doubt to be Recoverable Development costs should be amortised over a period not exceeding 5 years from the inception of the Benefits Disclosure requirements The financial statement should disclose: ¦ The accounting policies adopted for development costs ¦ The amortisation methods used ¦ The useful lives or amortisation rates used The amount of R&D costs recognised as an expense in the period; and ¦ A reconciliation of the balance of unamortised development costs at the beginning and end of the period. SAS 23 – PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS The statement applies to entities in accounting for provisions, contingent liabilities and contingent assets except financial instruments carried at fair value, executory contracts, insurance contracts and those covered by more specific requirements in another SAS.
Key Definition Assets: means resources controlled by an enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise. Constructive obligation: is a commitment arising from an enterprise’ action to other parties based on established pattern of past practice or published policies that it will accept certain responsibilities and the enterprise has therefore created a valid expectation on the part of those other parties.
Contingency: refers to an existing condition, situation or set of circumstance not wholly within the control of an entity involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resoled when one or more future event(s) occur or fail to occur. Contingent asset: is a possible asset that arises from past event (s) and whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future event(s) not wholly within the control of the entity.
Contingent liability: is a possible obligation that arises from past event (s) and whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future event(s) not wholly within the control of the entity; or a present obligation that arises from past event(s) where it is probable that a transfer of economic benefit will be required to settle that obligation and the amount can be measured with sufficient reliability. Liability: is a present obligation of an entity to transfer economic benefit as a result of past transactions or events.
Obligating events: is a past event that leads to a present obligation. Provision: refers to a liability that is of uncertain timing or amount. Relationship between Provisions and Contingent Liabilities All provisions are usually contingent since they are uncertain in timing or amount. The term contingent is used for liabilities as well as assets whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise.
The term “contingent liability” is used for liabilities that do not meet the recognition criteria of a “provision”. Accounting treatment of provision, contingent assets and liabilities SAS 23 requires a provision to be recognised only if (a) an entity has a present obligation as a result of a past event; and (b) there is a reliable estimate of the amount of the obligation. A provision should be used only for expenditures for which the provision was originally recognised. Contingent liabilities should not be provided for in the accounts and contingent assets should not be recognised.
A disclosure should be made if it is probable that a transfer of economic benefit will be required to settle the obligation (in case of liabilities) or future economic benefit will flow to the entity (in case of assets). Disclosure requirements For each class of provision, an entity should disclose: a) the carrying amounts at the beginning and end of the period b) additional provision made in the period c) amount utilised during the period d) unused amounts reversed during the period; and e) the increase in the discounted amount arising from the passage of time and the effect of any change in the discount rate. ) a brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits; g) an indication of the uncertainties about the amount or timing of those outflows h) the amount of any expected reimbursement, stating the amount of any asset that has been recognised for the expected reimbursement. Disclosures required in respect of contingent liabilities include a brief description of the nature of the contingency on which it depends and where applicable: ¦ The degree of uncertainty ¦ An estimate of its financial effects; and The possibility of any reimbursement. An entity should disclose information on contingent assets where an inflow of economic benefit is probable. SAS 24 – SEGMENT REPORTING Similar provisions to IAS 14 on Segment Reporting & IFRS 8 on Operating Segment SAS 25 – Telecommunications Activities (Issued November 2007) Purpose: This statement is issued to streamline the accounting treatment for telecommunications activities so as to enhance comparability of financial statements. It specifically covers: i. Timing Measurement and Recognition of Revenue ii.
Measurement & Recognition of costs iii. Depreciation, dismantling and removal costs of fixed assets iv. Capitalization & Amortization of Intangibles v. Calculation & Treatment of Impairment Key Issues: Fixed Assets Decommissioning Costs- The estimated cost of dismantling a site shall be included in the cost of the site as an item of PPE. Changes to this estimate shall be adjusted for accordingly and the entire cost shall be depreciated over the useful life. Depreciation of asset shall commence when the asset is available for use, whether or not its
Actually used. Component Accounting shall be adopted in treating Network assets. Each part with significant cost shall be depreciated separately. Intangibles Subscriber Acquisition Costs- This should be expensed at all times except where: i. The operator controls the future economic benefits by way of an enforceable contract through the costs incurred ii. That future economic benefits are sure iii. That costs incurred in the acquisition can be reliably measured Where the cost is capitalised, it should be over the specific period of the contract.
Licence Fee- Amortisation of Licence fee should start on the date of issue or commercial launch over the term of the Licence. Licence Fee should be tested for impairment. Co Location Arrangements – where the right to use capacity is sold, the seller shall not report it as sale of asset but as a rental income. The revenue from such arrangement shall be treated recognised on a straight line basis over the life of the asset. Where the transaction is to be treated as sale the proceed shall be treated as disposal of fixed asset and not turnover (except where the asset is designated as held for sale)
Disclosures: – Details of revenues from various types of telecommunications activity and how they are recognised. recognised – Description of deferred revenue – Description of the treatment of subscriber acquisition costs – Amortisation methods used for intangible assets – SAS 26 – Business Combinations (Issued November 2007) – (Complies with IFRS 3) Purpose: This statement is issued to guide the accounting treatment of business combination transactions. A combination is the bringing together of separate entities/businesses into one reporting entity.
Key Issues: Method of Accounting: The Acquisition method shall be adopted in accounting for all business combination. The acquirer shall be identified as the combining entity which has obtained control over other entities in the scheme. Measurement Principles & Acquisition Cost: For all biz combination: – The acquirer shall measure the identifiable assets, liabilities and contingent liabilities acquired and their values – Acquisition costs are costs incurred by the acquirer in effecting the combination. E. g. inders fee, advisory, legal, accounting etc. as well as the cost of maintaining an internal acquisition unit. All of these should be expensed in the period incurred – Where there are provisions for adjustment in the cost of the combination contingent on future events, such adjustment shall be included in acquisition cost by the acquirer at acquisition date. – The cost of acquisition shall be allocated by the acquirer by recognition of the acquiree’s identifiable assets and liabilities provided they meet the recognition criteria. Goodwill goodwill arising from combination shall be recognised as an asset – goodwill shall be recognised in the books at cost less impairment losses annually – Goodwill arising from combinations shall not be amortized but shall be tested Excess of Acquired asset over cost Where the net fair value of acquired asset exceeds the cost of combination, a reassessment should be done. If the position remains unchanged such excess shall be recognized immediately in profit and loss. Measurement Period: The measurement period is period over which the acquirer receives information about facts & circumstances that existed as of acquisition date.
However where the measurement (accounting) is incomplete as at the reporting date; a provisional amount shall be included in the financials of the acquirer for the period. Subsequent Measurement & Accounting An acquirer shall measure and account for acquired assets & liabilities in periods subsequent to the acquisition date. Where this becomes necessary, the following assets and liabilities taken over shall measured specifically in line with the provisions of this standard: o Re-acquired Asset o Contingent liabilities recognized as at the acquisition date. o Indemnification asset Contingent consideration. Disclosures: – Details of the nature and financial effect of combinations effected during the period – Details of the nature and financial effect of combinations effected after the balance sheet date but before the financial statements were signed. – Details of the provisional amounts included in the accounts for combinations that were incomplete as at reporting date. (with an explanation of why this is the case) – Where equity instrument(s) are issued as part of the cost; details of the number and value of such equity should be disclosed.
SAS 28 – Investments In Associates (Issued November 2007) – (In compliance with IAS 28) Purpose: This statement is issued to set out the criteria to establish significant influence and provide specific requirements on accounting for associates in the consolidated financial statement using the equity method. Key Issues: Method of Accounting: The equity method shall be adopted in accounting for all investment in associates except where – the investment is classified as held for sale – the following applies : The investor is a wholly owned or partially owned subsidiary of another entity o The investor’s debt or equity instrument is not traded publicly o The investor did not file nor is it in the process of filling its financial statements with a securities commission o A parent company of the investor produces consolidated financial statements The use of equity method shall be discontinued when an investor ceases to have significant influence over an associate (SAS 13 shall apply thereafter) The investor shall use the most recent financials available.
Where accounting policies of the investor and associate are different, adjustments should be made to conform the associate’s accounting policies to that of the investor. Impairment Losses The carrying amount of investment in an associate shall be tested for impairment Disclosures: – The fair value of investments in associates for which there are published proice quotations – Summarized financial information of associates including aggregate amounts of assets, liabilities, revenues and profit or loss. – The reporting date of the associate The fact that an associate is not reported using equity method and the reasons. SAS 29 – Interest in Joint Ventures Issued November 2007) – (Complies with IAS 31) Purpose: This statement is issued to guide the scope of accounting for interests in Joint Ventures, the alternative methods that may be adopted and the limited circumstances under which interest in Joint Venture might be accounted for at cost less any provision for impairment Key Issues: Jointly Controlled Operations: Each venturer shall recognize in its financial statements: – the assets it controls and the liabilities it incurs the expenses that it incurs and its share of income that it earns from sales of goods produced by the JV. Jointly Controlled Assets: Each venturer shall recognize in its financial statements: – Its share of jointly controlled assets classified according to the nature of the asset – Any liabilities that it has incurred – Its share of any liabilities incurred jointly with other venturers in relation to the JV – Any expenses that it has incurred in respect of its interests in the JV – Any income from the sale or use of its share of the output of the JV and the expenses incurred by the JV
Jointly Controlled Entities – A jointly controlled entity shall maintain its own accounting records and shall prepare & present financial statements – The venturer shall recognize its interest in a jointly controlled entity using either the equity method or the proportionate consolidation method. – Interests in a Jointly Controlled Entity shall be excluded from consolidation only if it is held for sale within 12months. – Where the JCE is a subsidiary of a venturer the venturer shall account for it using the provisions of SAS 27 (And SAS 28 for associate status) Operators of Joint Venture
The managers of a JV shall account for any fees as an expense by the Joint Ventur Disclosures: – The method of recognition of interest in Jointly Controlled entities – Detailed listing and description of interests in significant joint ventures and proportion of ownership interest held in the jointly controlled entity. – A venturer shall disclose the aggregate amount of the following contingent liabilities except where the probability of loss is remote o Contingent liabilities incurred by the venturer in relation to its interest in JV o Its share of contingent liabilities of the JV
SAS 30 – Interim Financial Reporting (Issued November 2007) – (Complies with IAS 34) Purpose: This statement is issued to specify the minimum content of interim financial reports and to standardize the presentation format for the presentation of interim reports. It is also to identify the recognition and measurement principles that should be applied in an interim financial report Key Issues: Content: An interim report shall include at a minimum the following: – condensed statement of Accounting Policies – condensed Balance Sheet – condensed Profit & Loss Accounts – condensed Statement of Cash Flow – selected notes to the account A statement indicating whether or not the report is audited or not. – For a group, only a consolidated Interim Financial Statements shall be published – the same accounting policies adopted for a full report shall be adopted for the interim financial report Disclosures: – The period covered by the report – The date on which it is approved by the board of directors – The extent to which the information it contains has been audited or reviewed – The frequency with which the organisation presents interim reports. Interim report should be made available within 45 days of the end of the interim reporting period.