June 2021

Question 1

Explain how the key objectives of international accounting and financial reporting standards were influenced by corporate collapses.

Answer 1

• (1) the objective to improve the transparency of financial reporting and make financial information reliable, relevant and easier to understand was, in part, needed in order to make it easier for stakeholders to see companies’ financial performance and position
• (1) the objective to reduce the risk of creative accounting because this was a contributory factor in several of the collapses
• (1) making the financial statements of different periods or of different entities comparable, so that stakeholders can better understand and compare them
• (1) increasing the credibility of financial statements by improving the uniformity of accounting treatment between companies, again to make them easier for stakeholders to compare and contrast with each other, and because several of the collapses had resulted from irregularities in the accounting procedures
• (1) providing quality financial reports and accounting information which can be relied upon for consistency, commonality and overall transparency, as irregularities in accounting procedures was seen as a significant factor in some of the collapses

Question 2

Explain the purpose of the IASB Conceptual Framework for Financial Reporting.

Answer 2

(1) When it was introduced, the primary purpose of the Conceptual Framework was to assist the IASB in the development of future IFRSs and in its review of existing IASs and IFRSs. It is statement of generally accepted theoretical principles that underlie the framework for the preparation and presentation of financial statements

(1) In doing so, it also provided increased transparency to the work of the IASB, by providing those who are interested in the work of the IASB with information about its formulation of IFRS

(1) The IASB wanted the Conceptual Framework to provide a basis for reducing the number of alternative accounting treatments permitted by IFRSs. Those that conflicted with the Framework could be reviewed and potentially removed.

However the Conceptual Framework has also helped numerous other people and bodies and may assit:
- (1) preparers of financial statements in developing accounting policies for transactions or events not covered by existing standards;
- (1) national standard setting bodies in developing national standards;
- (1) preparers of financial statements in applying IFRS
- (1) auditors in forming an opinion as to whether financial statements comply with IFRS;
- (1) users of financial statements in interpreting the financial statements prepared in compliance with IFRS

Question 3

Describe the objective of portfolio management and the elements of an efficient investment portfolio.

Answer 3

(1) The objective of portfolio management is to select the right investments in the right proportions

(1) to generate optimum returns, whilst minimising risk.

The key elements of an efficient investment portfolio are:
- (1) return - steady returns that at least match the opportunity cost of the funds invested
- (1) risk reduction - minimise the overall risk to an acceptable level
- (1) liquidity and marketability - assets which can be marketed without difficulty
- (1) tax shelter - developed considering the impact from taxes and possible mitigations
- (1) capital appreciation - some of the assets appreciating in capital value to protect from inflation

Question 4

Explain the overriding concepts for the preparation of published financial statements.

Answer 4

• (1) going concern - financial statements are normally prepared assuming the entity will continue in operation for the foreseeable future
• (1) accruals basis of accounting - requires transactions to be accounted for in the period when income is earned or expenses incurred, not when they are received or paid in cash
• (1) materiality - each material class of similar items should be presented separately
• (1) reporting period - should produce financial statements at least annually, and make disclosures if the reporting period is changed
• (1) offsetting - assets and liabilities, and income and expenses, shall not be offset unless required or permitted by a standard

Question 5

Describe the movements that could be reported in a statement of changes in equity.

Answer 5

• (1) changes in equity share capital, including issue for cash (capital contributions) and redemptions)
• (1) dividends, representing distribution of wealth attributable to shareholders
• (1) profit or loss attributable to shareholders during the period as reported in the statement of profit or loss
• (1) revaluation gains or losses recognised during the period (to the extent they are recognised outside the statement of profit or loss)
• (1) any other gains or losses, such as actuarial gains or losses on employee benefits
• (1) transfers between components of equity, for example, when an asset held for sale is eventually disposed of, any gain held in the revaluation surplus will be transferred within equity to retained earnings
• (1) prior period adjustments, to correct any material mistakes or adjustments from a change to an accounting policy from prior periods or new or revised accounting standards