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38 Cards in this Set
- Front
- Back
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What is Financial Reporting? |
Financial reporting is the process of identifying, measuring and communicating economic information to others so that they can make decisions based on that information and assess the stewardship of the entity's management. |
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What is the conceptual framework? What are the chapters that have been published? |
The conceptual framework is the foundation on which the financial statements are produced as well as for the standards set to regulate their production. The conceptual framework is not a standard and so does not overrule any individual IFRS's. If there is a conflict between an IFRS and the conceptual framework, the IFRS will prevail. The conceptual framework is made up of the following chapters: 1) The objective of general purpose financial reporting 2) The reporting entity (not issued yet) 3) Qualitative characteristics of useful financial information 4) Remaining text of the 1989 framework. |
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What is the purpose and content of the conceptual framework? |
- Assist the board in the development of future IFRS's as well as to review existing ones. - assist the board in promoting harmonization of regulations. - Assist national standard-setting bodies in developing national standards - Assist preparers of financial statements in applying IFRSs and in dealing with topics that have yet to form the subject of an IFRS - Assist auditors in forming an opinion as to whether FS's comply with IFRS's Provide those who are interested in the work of the IASB with information about its approach to the formulation of IFRS's. |
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What is the objective of general purpose financial reporting? |
The objective of general purpose financial reporting is to provide information about the reporting entity that is useful to existing and potential investors, lenders and other stakeholders in making decisions about providing resources to that entity. The users need information about: - the economic resources of the entity - the claims against the entity - changes in the entity's economic resources and claims. |
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What are the fundamental qualitative characteristics of useful financial information? |
- Relevant: Relevant financial information that is capable of making a difference in the decisions made by users i.e. if it has predictive and/or confirmatory value. -Faithful representation: to be useful, financial information must faithfully represent the economic phenomenon that it purports to represent. To achieve this, financial information should be complete, neutral and free from error. Faithful representation of a transaction is only possible if it is accounted for according to its substanance and economic reality. |
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What are the enhancing qualitative characteristics of useful financial information? |
- Comparability: Information is more useful if it can be compared with similar information about other entities and other periods. Consistency helps to achieve comparability. Verifiability- helps assure users that information faithfully represents the economic phenomena it purports to represent. Timeliness- information is only useful if it is available to decision-makers in a timely manner. - Understandability- classifying, characterizing and presenting information clearly and concisely. |
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What are the elements of the financial statements? |
- Asset: a resource controlled by an entity as a result of past events from which future economic benefits are expected to flow to the entity. - Liability: a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of economic resources. - Equity: the residual interest in the assets of an entity after deducting all its liabilities. - Income: Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in an increase in equity, other than those relating o contributions from equity participants. Expenses: Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or increases of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. |
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When is an item recognised in the financial statements? |
An item is recognised in the financial statements when: - it meets the definition of an element - it is probable that any future economic beenfits associated with the item will to or from the entity - the item has a cost or value that can be measured reliably |
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What are the methods of measurement per the Conceptual Framework? |
1) Historical cost 2) Current cost 3) Realisable value 4) Present Value |
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What are the 2 concepts of capital maintenance? |
1) Financial capital maintenance- a profit is made if there is an increase in net assets or equity excluding the effects of contributions from or distributions to the owners. 2) Physical capital maintenance- capital is regarded as the productive capacity or operating capability of the entity based on, for example, units of output per day. |
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What are the fundamental principles of the ICAEW code of ethics? |
- Integrity: being straightforward and honest in all professional and business relationships - Objectivity: Do not allow bias, conflicts of interest or undue influence of others to override professional or business judgement. - Competence and due case: maintain professional knowledge and skill at the level required. - Confidentiality: respect the confidentiality on information acquired professionally. Disclose only with proper authority or due to legal/professional duty. Not to use such information for the personal advantage. - Professional behavior: comply with relevant laws and regulations and avoid any action that discredits the profession. |
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What are the threats to the fundamental principles of the ICAEW code of ethics? |
- self interest - self review - advocacy - familiarity - intimidation |
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How to handle an ethical dilemma? |
1) Identify what is wrong. 2) Why is it wrong? (i.e. self review, self interest threat etc) 3) What to do? - Talk to the person in question - Go to the BOD- audit committee if one - ICAEW Helpline - Get legal advice - Resign from your position |
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What is the objective of IAS 8? |
The objective of IAS 8 is to prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and correction of errors. This enhances relevance, faithful representation and comparability. |
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What are accounting policies? |
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. Entities preparing FS's should select policies that will faithfully represent the effect of transactions on the performance, position and change to position of the business. This can be achieved by following applicable IFRS e.g. IAS 18 when considering on what basis to recognize sales. |
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When can accounting policies be changed? |
Changes in accounting policies are only permitted when: - The change in policy is required by an IFRS - The change will result in the financial statements providing reliable and more relevant information. If a change in accounting policy occurs, then this change must be applied retrospectively to aid comparability. |
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What is retrospective application? |
This is where a new accounting policy is applied to transactions, other events and conditions as if that policy had always been applied. |
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Give some examples of accounting estimates. |
- Bad debt allowances - Useful lives of depreciable assets - Adjustment for obsolescence of inventory |
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What does IFRS say about changes to accounting estimates? |
A change to an accounting estimate should be applied prospectively i.e. so that the effect of a change in accounting estimate should be included in the determination of net profit or loss in the period of the change (e.g. bad debt estimate) or the period of the change and future periods (e.g. a revision in the life over which an asset is depreciated). |
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What is meant by prior period errors? |
Prior period errors are omissions from, and misstatements in, the entity's FS's for one or more prior periods arising from a failure to use, or misuse of, reliable information that: - was available when FS's for those periods were authorized for issue. Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those FS's. Examples of such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretation of facts, and fraud. |
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What is the accounting treatment for prior period errors? |
Material prior period errors should be corrected retrospectively. It should correct the recognition, measurement, and disclosure of amounts of elements of financial statements as if the prior period error had never occurred. This involves: - Either restating the comparative amounts for the prior period in which the error occurred. - If the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented. Only where it is impracticable to determine the cumulative effect of an error on prior periods can an entity correct a prior period error prospectively. |
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What ethical considerations should be made regarding accounting policies? |
The selection of accounting policies should be made with reference to applicable standards and interpretations as issued by the ISAB. In the absence of a standard, IAS 8 states that reference is made to the standard of a similar nature, the conceptual framework and other GAAP of principle based standard setting bodies. Where a standard offers a choice of treatment, the policy selected by an entity should be based on what will give the fairest representation of the transaction. This is important for users of the FS's in order for them to make informed economical decisions. A change to accounting policies should be made where there is a change to the applicable standard or the change gives information of better quality to the users. |
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What is IAS 1? |
IAS 1 prescribes the basis of preparation of the FS's to ensure comparability with the entities own financial statements of prior periods and the FS's of other entities. |
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What does IAS 1 say about the format of financial statements? |
IAS 1 requires that certain information should be presented on the face of the primary statements and others to be presented in the notes instead. The following info should be presented prominently: - Name of the reporting entity - Whether a single entity or a group - Date of the end of the reporting period and/or period covered - Presentation currency - Level of rounding used. FS's should be presented at least annually, but if an entity chooses a longer/shorter period then they should disclose the reason and the fact that comparatives are not comparable. An entity should also present comparatives for every amount included in the FS's. |
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What is current tax?
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Current tax is the amount of tax payable or recoverable in respect of taxable profit or loss for the period. At the end of a year, an entity will estimate how much income tax will be due on its profits Dr income tax expense Cr income tax liability The amount of tax actually paid when the tax is due may be different from the amount that was estimated in the FS's. This is simply a change in an accounting estimate and the over/under provision is adjusted in the next FS's. |
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What does IFRS 5 say about a discontinued operation? |
- A component of an entity that ether has been disposed of or is classified as held for sale. - it represents a separate major line of business or geographical area of operations - is part of a single coordinated plan to dispose of a separate major line of business or deographical area of operations - is a subsidiary acquired exclusively with a view to resale - a component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. - a discontinued operation must either: - have been disposed of- disclosures will be made in the period in which the disposal takes place - is held for sale- disclosures will be first made in the period in which the decision to dispose of it is made (provided that it is highly probable that it will be sold within 12 months of classification. |
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Which fundamental qualitative characteristic applies to discontinued operations? |
Relevance e.g. presenting the results of a discontinued operation separately from the continuing business. |
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How should discontinued operations be presented in the financial statements? |
An entity should disclose a single amount in the statement of profit or loss comprising of the post-tax profit/loss of discontinued operations and any post-tax gain/loss on related assets. |
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What is the difference between IFRS 5 and FRS102 disclosure requirements for discontinued operations? |
The basic provision of FRS 102 is very similar to that of IFRS 5 in that it requires the separate disclosure of continuing and discontinued activities. There are a number of key differences as follows: a) Under FRS102 discontinued operations are disclosed in a separate column in the income statement, showing the amount for all income and expense lines attributable to the discontinued operation. b) FRS 102 does not have the category 'held for sale'. Assets of a discontinued operation continue to be depreciated up to the date of disposal. |
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What is foreign currency? |
A currency other than the functional currency of the entity. |
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What is a functional currency? |
The currency of the primary economic environment in which the entity operates. |
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What is the spot exchange rate? |
The exchange rate on the day of the transaction. |
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What is the closing rate? |
The rate of exchange at the year end date. |
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How are foreign currency transactions accounted for under IAS 21? |
1) Initial recognition: a foreign currency transaction should be initially recorded at the spot rate. 2) Reporting at subsequent year-end: a) Restate foreign currency using the closing rate. b) Do not estate non-monetary items (e.g. NCA's, Inventories). They are carried at historical cost in a foreign currency using the spot rate. c) Restate non-monetary items which are carried at fair value in a foreign currency using the exchange rates that existed when the fair values were measured 3) Recognition of exchange differences |
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What does IAS 16 say about the recognition of PPE? |
Measured at cost on initial recognition - Purchase price - Directly attributable costs (site preparation, delivery, installation and assembly costs, costs of testing, employee benefits arising directly from construction/acquisition of the item and professional fees) - Estimate of dismantling and site restoration costs |
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What are the 2 models for PPE measurement set out by IAS 16? |
A) The cost model- an item of PPE is carried at cost (i.e. initial cost plus subsequent expenditure less accumulated depreciation and impairment costs. B) The revaluation method- an item of PPE is carried at the revalued amount, being fair value less accumulated depreciation and impairment losses. |
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What is depreciation? |
Depreciation is a means of spreading the cost of a NCA over its useful life. Depreciation should commence when the asset is in the location and condition necessary for it to be capable of operating in the manner intended. |
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What are the main methods of depreciation? |
- Straight line method - Reducing balance method The depreciable amount should be charged to the P&L over the useful life of the asset using the method that best reflects the pattern in which the future economic benefits are consumed. A change to the depreciable amount, estimated economic life and depreciating method is a change in accounting estimate and the change is applied prospectively in line with IAS 8. |
