Part A:

CBA. is a rapidly expanding manufacturing business. The main shareholder and C.E.O., Mr. Marcos, who has very little previous financial knowledge, has provided you, his new accountant, with a set of draft financial statements for the year ended 31 December 2019 which he prepared on a cash basis. Your initial thoughts are that financial statements are normally prepared on an accruals basis rather than a cash basis. You have subsequently made a number of adjustments to the financial statements in order to apply the accruals basis.

Requirement: An important requirement of the Conceptual Framework for Financial Reporting 2018 (IFRS Framework) is that in order to be reliable, an entitys financial statements should represent faithfully the transactions and events that it has undertaken.

Draft a memorandum to Mr. Marcos addressing:

a) The purpose and authoritative status of the Conceptual Framework.

b) What is meant by faithful representation and how it enhances reliability?

c) What is meant by the accruals basis and why the financial statements of CBA would be more useful to users if they were prepared on an accruals basis.

d) Provide illustrative examples for FOUR possible adjustments that you may have made to the SPLOCI and/or the SOFP in order to present the financial statements on an accruals basis.

Part B

On the 10 February 2020, the following items were brought to your attention. No adjustments have been made to the 31 December 2019 financial statements in respect of these. The financial statements will be reviewed and authorized by the Board of Directors of Peru on 31 March 2020.

i. CBA invested extra cash in an Investment, which cost 1,000,000 and has been included in the financial statements at this amount. This investment has since declined in value to 900,000.

ii. A customer, who owed 3,000 as at 31 December 2018 (last year), was declared bankrupt on 10 March 2019. No payment was received in respect of this debt in 2019.

iii. A supplier has taken legal proceedings against Peru and at 31 December 2019, the case was ongoing. In late February 2020,CBA was found to be liable for damages and costs totaling 1.2million.Subsequently, CBA filed a claim with its insurers and on 9 March 2019 was notified that the insurer would cover 800,000 of the damages.

Requirement

a) Explain, in accordance with IAS10, Events after the reporting period, the difference between an adjusting event and a non-adjusting event;

b) Explain, with reference to IAS10, how each of the above THREE items should be accounted for in the 31 December 2019 financial statements of CBA