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Flashcards in Accounting Chapter 5 Deck (21):

What is the framework?

It sets out the concepts that underline the preparation and presentation of financial statements and also consider the requirement of IAS1. It includes:
- the objectives of financial statements
- the qualitative characteristics that determine usefulness of information in financial statements.


What does the IASB stand for and what do they do?

International Accounting Standards Board. The issue International Accounting Standards


When was the framework issued?



What is the objective of financial statements?

To provided information about the reporting entity that is useful to existing and potential investors, lenders adn other creditors in making decisions about providing resources to the entity?


What are the 11 user groups identified by the Framework?

1. Managers/Directors
2. Investors (existing and potential)
3. Employees
4. Lenders
5. Suppliers and other trade creditors
6. Customers
7. Government and their agencies
8. The public
9. Stock market analysts and advisers
10. Competitors
11. Management of the business


What are the fundamental qualitative characteristics of financial information? Define them briefly.

1. Relevance - needs to help the users decision. It may have predictive value (helping user assess the future) or confirmatory value (helps users in confirming past predictions).

2. Faithful representation - in order to faithfully represent the transactions, the information must be: COMPLETE, NEUTRAL, FREE FROM ERROR. Furthermore, transactions must be presented according to their economic substance rather than legal form.


What are the enhancing qualitative characteristics?

1. COMPARABILITY - Information should be produced on a consistent basis and should be comparable to other entities and previous financial records.

2. VERIFIABILITY - Information cab be checked and a consensus can be reached by observers that the information faithfully represents transactions or events.

3. TIMELINESS - Info should be supplied to users in time to be used in decision-making. Recent info is more useful in most cases

4. UNDERSTANDABILITY - Info must be understandable to users who have a reasonable knowledge of business and accounting.


What are the two underlying assumptions documented in the Framework?

1. The accruals basis of accounting
2. The going concern basis


What does IAS1 contain?

It is important as it deals with structure and content of FS. There are prescribed formats that are recomended. IAS1 states that a set of financial statememnts comprises:
- a SOFP
- an I/S
- A statement showing changes in equity
- A statement of cash flow
- Accounting policies and explanatory notes


What is the objective of IAS1? How does IAS1 require info to be presented?

Stated purpose is to prescribe the basis of presentation in order to ensure comparability.

The FS should present fairly the financial position, the financial perofroamnce and cashflows of the entity.


Does IAS1 require disclosure? What happens if there is a departure?

Yes - an entity whose FS comply with IAS should disclose. If there is a departure in order to achieve fair presentation, this should be disclosed with an explanation of circumstances and an estimation of the financial impact.


What does IAS1 say about comparative information?

IAS1 requires that:
- FS include comparative info for all amounts (e.g. PY) including narrative and descriptive info.
- Where preentation or classification is changed the comparative items should be reclassified.
- This enables performance to be compared.


What is the accruals concept?

The accruals concept requires that transactions and events are recognised when they occur not when cash is received or paid for them.


What is the going concern concept?

The going concern concept require that:
- the entity is viewed as continuing its operations for the foreseeable future.
- an assumption is made that there is no intention or necessity to liquidate or curtail materially its operations

The effect is that assets do not need to be valued on a break up basis or the value at which they could be sold separately upon liquidation.

If the management do not believe the going concern concept should be applied this should be disclosed, along with basis of account and reasons why entity is not a going concern.


What is materiality?

Information is material if its omission or misstatememnt could influence the economic decisions of users taken on the basis of financial statements


Is offsetting permitted by IAS1?

No - assets and liabilities or income and expense cannot be offset unless another IAS allows it.


What is the money measurement concept?

Accounts can only record items to which a monetary value can be attributed. Therefore only assets with a reliable monetary amount will appear in FS.


What is the realisation concept?

A transaction should be recognised whn the event from which it stems takes place and teh receipt of cash form the transaction is reasonably certain.


What is the historical cost convention? What is the advantage?

Generally assets and liabilities are recorded in the SOFP at their historic cost:
- assets are recorded at the amount of cash or cash equivalents paid, or the fair value of consideration
- liabilities are recorded at the amount of proceeds received in exchange for their obligation

Removes the subjectivity


Why is there a need for regulation?

- ensures accounts are reliably and useful and prepared promptly
- Used as starting point of taxable profits
- Main doc for shareholding reporting
- stock markets rely on FS
- International investors prefer similar/comparable info


How is accounting regulated (5) ?

1. Legislation - Companies Act 2006 requires set formats and contents
2. Accountign concepts - help where judgement is required.
3 Financial Reporting Standards - Clarifies how to acount for and present item in FS
4. GAAP - set of Generally Accepted Acounting Practice for a given country
5. Concept of fair presentation - IAS1 requires fair presentation. In UK Companies Act requires true and fair view