M1: P&D of FS Flashcards
(17 cards)
What regulations must be complied with by companies (Listed, unlisted) and why?
Listed:
- The Companies Act (2006)
- IFRS Accounting Standards
Includes:
- IAS (older international accounting standards)
- IFRS
Issued by: The International Accounting Standards Board (IASB)
Unlisted:
- FRS - UK accounting standards, based on IFRS for small and medium-sized entities (SMEs)
- The Companies Act (2006)
What are the qualitative characteristics and why do I need them?
WHAT:
Fundamental:
- Relevance (Information must be capable of affecting a user’s decisions)
- Faithful representation (Information must represent the substance of a transaction that it claims to represent, not just the legal form)
Enhancing:
- Verifiability (An independent preparer, when faced with the same information, would arrive at a similar conclusion.)
- Timeliness (Users must receive information in time to be capable of making decisions. The older the information, the less relevant.)
- Understandability (Information must be classified and presented clearly and concisely.)
- Comparability (Users must be able to compare financial information from one year to the next and from one company to another.)
WHY: Qualitative characteristics ensure that the information contained in the financial statements is useful.
Can I define the elements of financial statements?
Assets
Liabilities
Equity
Income
Expenses
What are the recognition criteria for including an item in the FS?
The criteria for including an item in the financial statements are:
That the information about the item to be included in the financial statements must be relevant for the users of financial statements
That the information must faithfully represent the item and its economic benefits
What is fair value?
Fair value (FV) is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
How do we calculate fair value?
Market based measurement. Identify the principal market and determine the price.
What is the relevance of IAS 1?
IAS 1 covers the presentation of financial statements including SPLOCI, SOFP and SOCIE.
The standard echoes some of the principles included in the framework, such as:
Fair presentation (faithful representation), which is achieved by applying all of the IFRS
Accounting Standards, with additional disclosure as required
Going concern
Accrual basis of accounting
Materiality, aggregation and offsetting
Relevance, comparability and understandability
Consistency
What are the 3 groups that expenses, except financing and taxation, classified into function groups on the SPLOCI?
Cost of sales, which comprises all costs of production, including opening less closing
inventory
Distribution costs, which comprises all selling and distribution costs (costs of delivering
products to the customers)
Administration expenses, which comprises all costs that are neither production related nor distribution related, such as directors’ salaries
What are the line items that need to be presented separately on the face of the SPLOCI or in the notes?
Revenue
Finance costs
Share of profit or loss of associates and joint ventures (Module 6)
Tax expense
Gains/losses from the derecognition of financial assets (Module 5)
Impairment losses measured in accordance with IFRS 9 (Module 5)
Certain gains or losses arising on reclassification of some financial assets (Module 5) [82]
What is an accounting policy?
Accounting policies are “the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements”.
When can you only make a change to accounting policy?
The IFRS Accounting Standard has changed.
The change in policy will result in financial statements providing more reliable and more
relevant information
What is an accounting estimate?
Estimates are “monetary amounts in financial statements that are subject to measurement uncertainty”.
If you change an accounting estimate, what is the effect on the
financial statements?
If an estimate changes, you should account for the change PROSPECTIVELY, which means that you change the current and future positions only. [You do not restate the past.
You must:
Apply the new estimate to the revenue and expenses in the period of change as well as in future years.
Recognise the effect of the change in accounting estimate on the carrying amounts of assets, liabilities and equity in the period of the change and in future periods.
What is a prior period error?
Prior period errors are omissions from, and misstatements in, a company’s financial statements for one or more prior periods.
The errors must have arisen from a failure to use reliable information that:
a) Was available when financial statements for those periods were authorised for issue, and
b) Could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements
If you have to correct a prior period error, what is the effect on the financial
statements?
If you are trying to correct a prior period error, the accounting is very similar to a change in accounting policy in that it is a RETROSPECTIVE restatement.
This means that you will need to restate the comparative amounts, which could mean that you have to go back to the year prior to the comparative amounts as these balances will affect the opening balance of the previous year.
What are Events after the reporting period?
What IAS standard covers this?
IAS 10: Events after the reporting period only covers the date between year end and the date the directors authorise the financial statements for issue.
What 2 categories does IAS 10 Events after the reporting period classify into?
1) Adjusting events: Events that provide evidence of conditions that already existed at the end of the reporting period
Action: Adjust the amounts recognised in the financial statements
2) Non-adjusting events: Events that arose after the reporting period
Action: Do not adjust amounts recognised in the financial statements , unless it is material in nature or amount, in which case, disclose the nature and an estimate of the financial effect
