Accounting conventions

Question 1

For incorporated companies in the UK, what are the key elements of the regulatory framework?

Answer 1

Company law
International Financial Reporting Standrads (IFRS)
Stock Exchange rules

Question 2

Explain the IFRS conceptual framework?

Answer 2

Addresses the underlying preparation and presentation of financial information

specifies the qualitative characteristics of useful financial information

The underlying assumption is that an organisation is a going concern (it will continue to operate indefinitely)

Question 3

What are some other key principles/conventions of accounting?

Answer 3

. Accruals
. Consistency
. Objectivity
. Prudence
. Economic realism
. Money measurement

Question 4

What is the consistency convention?

Answer 4

Consistency of treatment of items from one period to the next

Question 5

What is the objectivity convention?

Answer 5

Subjectivity and personal involvement is dangerous. Accountants need to be neutral

Question 6

What is the prudence convention?

Answer 6

Prudence in that revenue and profits are not anticipated and provision is made for all known liabilities

Question 7

What is economic realism?

Answer 7

Economic realism
The interpretation of real events, states and transactions must be realistic in terms of prevailing
economic/market conditions.

Question 8

What is money measurement?

Answer 8

Money measurement

Only facts which can be expressed in monetary terms are included in financial statements.

Question 9

What are the main qualitative qualities categories in the IFRS conceptual framework?

Answer 9

Fundamental and enhancing

Question 10

What are the fundamental qualities?

Answer 10

. Relevance- capable of making a difference in the decisions made by users
. Faithful representation-completeness, neutrality and freedom from error

Question 11

What are the enhancing qualities?

Answer 11

. Comparability-to similar infromation in other firms and same entity
. Timeliness-available in time to make a difference
. Verifiability-independent observers confirm faithful representation
. Understandability-for people with reasonable knowledge

Question 12

What are the key asset measurement bases recognised by the IFRS framework and define?

Answer 12

Historical cost (HC) : Items are recorded at in accounts at what they cost to acquire, not what they are worth today
 Net Realisable Value (NRV) : Items are recorded at their settlement value (what we are likely
to receive in cash if we sell them)

Question 13

Explain the use of the key measurement bases

Answer 13

. Historical cost is the primary measurement basis most commonly used today,
. But other views may be used e.g. when the market value of inventory has fallen below what we paid for it, we revalue it to NRV