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30 Cards in this Set
- Front
- Back
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Control |
IFRS 3: Thepower to govern financial and operating policies of an entity so as to obtainbenefits from is activities. IFRS 10: Ifcontrol is established, then consolidated accounts must be prepared |
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Why do we have Consolidated Financial Statements |
o To measure group's directors in performance o To prevent inaccuracy over inter-company transactions o To Provide meaningful EPS, As it covers all parent investments. |
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Theories definition |
Hendriksen, 1971: Coherent set of hypothetical, conceptual and pragmatic principlesforming the framework of reference for a field of work.Accounting is a socialscience. |
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Positive theories |
o Descriptive: Popular pre-1960s, describe "what is" examples HCA and prudence conventions o Prescriptive: Post 1960s, describe "What will be." PAT(Watts & Zimmerman, 1978) |
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Normative theories |
o Concerned with what “Should be," describes norms (views & beliefs) of the theorist. A prime example is Current Cost Accounting theory. Everyone refused it as they couldn't take individual indexes of every item. |
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Critique of positive theories |
o Describes “whatis”, therefore no base for evaluation o Assumes majoritybehaviour as right o Prescriptivenature can alienate academics from practioners. |
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Critique of normative theories |
o They aresubjective views o They areuntestable, “unscientific” |
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Traditional arguments for preparing FRs |
o Legal requirements o Stewardship o Comparability o Decision making o Fraud prevention |
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Economic arguments for preparing FRs |
o Agency theory (Mecklin,1976) Creating expensivecontracts and monitor. o PAT (Watts & Zimmerman, 1986) FRs tells entityvalue and become monitoring tool. o PAT efficiency principal states values may bemisleading. o EMH suggests markets can exist without FRs. |
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Regulation Vs Free |
o Companies act 2006 in the UK o Section 393: FRs should be “true and fair” o Section 395: FRs should follow 396 or IFRS o Justice Hoffman, 1983: “Accountants that depart fromthe standard without adequate justification may be held as not being true andfair.” o Financial info should follow supply and demand. o Regulations cost companies by generating excess info. o Hakansson,1977: Losses due to providing data tocompetitors. o PAT argues that managers are in the best place to pick info o Current regulations limit creativity and efficiency o Most investors invest on historical information andnews pieces, EMH. o Firms capture regulators. o Cooper & Kiem, 1983: Pubic good and free-riding leads to under production. o Without regulation, only those with power could get info advantage. o PAT states that without regulation agents will act, regulation is used to fix holes in information for readers. |
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Conceptual Framework |
IASB 2010: Frameworksets out the concepts that underpin preparation and presentation of FRS Benefits: o Assists standards in being consistent o Assists creators of FRs o Acts as guide when using Professional Judgement o Assists auditors in assurance o Assists others in understanding policy decisions. |
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Critique of Conceptual Framework |
Deegan and Ward, 2013 Critique: o Lenders/investors at centre, rarely see Social or environmental information on FRs. Notes on FRs. o Framework only written to legitimise FR when it was under attack as being incorrect. |
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Fundamental Characteristics |
o Relevance o Faithful representation(Completeness, Neutrality and Free from error) |
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Enhancing Characteristics |
o Comparability o Verifiability o Timeliness o Understand-ability (Range of information) |
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Standard Setting - "Due Process" Advantages |
o Imbue investors with confidence o Process is detailed, so best regulations found . o Create uniformity leading to credibility andcomparability. o Limits agency problem and manipulation. |
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Standard Setting - "Due Process" Disadvantages |
o Standards influenced by lobbyists o One Size fits all accounting policies o Can lead to information overload |
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Assets |
o Probable that future economic benefits will flow to the entity o Value/cost can be measured for the item |
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Intangible Assets |
o No physical form o Hard to cost o Know what they are but not the cost/value o Uncertainty over cash flows |
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IAS 38 |
Internal goodwill never recognised. Research Recognised at cost Development recognised if it fufils the following: o Feasible to complete for sale o Intention to complete for sale o Have resources to complete o Market to sell o Ability to sell o Can measure development costs o Can demonstrate future economic benefit |
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Accounting for goodwill |
o Goodwill is incapable of realisation separate from the entity o Value of goodwill is subjective o No reliable relationship between the value and the cost of goodwill o Individual factors in goodwill hard to calculate o Value can fluctuate Consequences: o Can effect asset base if miss reported o Can effect P+L for a given period |
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Construction contracts |
Issues raised from construction: o Should revenue be recognised progressively or on completion o What proportion of revenue should be recognised. Fixed price contracts with escalation clauses are the most common now |
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Completed Method costing for construction |
Recognise income when contact completed. Prudence and reliability conventions are upheld with this method |
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Percentage Method costing for construction |
Proportion of net income recognised over period. Matching and relevance conventions are upheld with this method |
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IFRS 15 |
Will replace IAS 11 in January 2018. Contract revenue will only be represented when there is a transfer of agreed goods and services for the pre-agreed amount that the contractor is expecting for those goods and services. Based around passing control. |
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5 Core Steps of IFRS 15 |
1...Identify the contract with the customer 2...Identify the performance obligations 3...Determine transaction price 4...Allocate transactions to performance obligations 5...Recognise revenue when performance obligations are completed |
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Issues raised by IFRS 15 |
o Will contractor continue to recognise revenue as contract progresses? o Transfer of control near contract end o Might lead to contract charges that are already in place. o IBM software and hardware development are prime examples of contract changes. |
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IAS 28 |
Associated companies recognised by one of the following: o Representation on the board o Participation in policy making o Material transactions between entities o Interchange of personnel o Provision of key technical information |
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IAS 21 definition of functional currency |
o Whichcurrency effects sales price, and costs of sales. o Whatis the currency of the country that regulates sales. o Currencythat raises funds from debt and equity instruments. o Currencyon receipts of operating activities. |
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Temporal Method |
Temporal method: when a companies presentation currency is different to the that of the reporting parent, but the functional currency is the same. o FX loss/gain the balancing figure on income statment |
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Closing/Current Rate Method |
Closing rate method: when a companies presentation currency and functional currency are different to the that of the reporting parent. o FX loss/gain the balancing figure on Statement of Financial position |
