The Conceptual Framework, Accounting Concepts And Conventions

Question 1

Objective of financial statements according to the IASB

Answer 1

Provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity

Question 2

Qualitative characteristics of financial information

Answer 2

Relevance
Faithful representation

Question 3

Relevance

Answer 3

Assisting users’ decisions by aiding evaluation of events

Question 4

Values relevant information can have

Answer 4

Predictive
Confirmatory (Helps confirm past predictions)

Question 5

Ways information can be relevant

Answer 5

Nature
Materiality

Question 6

5 elements of faithful representation

Answer 6

1. Complete
2. Neutral
3. Free from error
4. Showing substance over form (economic not legal)
5. Neutrality

Question 7

How is neutrality supported

Answer 7

Exercise of prudence.

Prudence involves caution in uncertainty

Question 8

Enhancing qualitative characteristics

Answer 8

1. Comparability
2. Verifiability
3. Timeliness
4. Understandability

Question 9

Verifiability

Answer 9

Overall consensus able to be reached by observers that the information faithfully represents transactions/events

Question 10

Timeliness

Answer 10

In time to make decisions

Some information remains timely for a long time after a reporting period

Question 11

Understandability

Answer 11

With reasonable knowledge of business and accounting

Question 12

Underlying assumption

Answer 12

Going concern

Question 13

IAS 1 Presentation of Financial Statements: Definition

Answer 13

Recommended FORMATS (structure and content)

Question 14

IAS 1: Constituents of a set of financial statements

Answer 14

1. Statement of financial position
2. Statement of profit or loss
3. Statement of changes in equity/changes in equity except those arising with owners
4. Statement of cash flow
5. Accounting policies and explanatory notes

Question 15

Objective of IAS 1 Presentation of Financial Statements

Answer 15

Ensure compatibility

Question 16

Objective of financial statements

Answer 16

Summarise accounting transactions of a period

Question 17

IAS 1: Financial Statements should fairly present:

Answer 17

1. Financial position
2. Financial performance
3. Cash flows

Question 18

Fair presentation

Answer 18

Faithful representation of the effects of transactions (in accordance with Conceptual Framework)

Applications of IFRS assumed to achieve fair presentation

Question 19

Departures from International Accounting Standards

Answer 19

1. Entities who comply with IAS should disclose that
2. May depart in extremely rare circumstances to achieve fair presentation
3. This departure requires disclosure in accounts, explanation of circumstances and estimation of financial impact

Question 20

Accruals/Matching Concept

Answer 20

Costs incurred are matched against revenues generated

Question 21

Going concern concept

Answer 21

1. Entity required to be viewed as continuing its operations for the foreseeable future (at least 12m)
2. Assumed there is no intention/necessity to liquidate or materially curtail operations

Question 22

Going concern implication

Answer 22

Assets don’t need to be valued on a break-up basis (individual selling price on liquidation)

Question 23

What must be disclosed if management don’t think going concern concept should be applied

Answer 23

1. The fact
2. Basis on which the accounts have been prepared
3. Reasons why entity not going concern

Question 24

IAS 1 Materiality

Answer 24

If omission/misstatement/obscuring could influence economic decisions of users taken on basis of financial statements

Question 25

IAS 1 Materiality depends on

Answer 25

Size or effect of the item if omitted/misstated

Question 26

Offsetting

Answer 26

Assets + Liabilities or Income + Expenses deducted from one another

Question 27

IAS 1 on offsetting

Answer 27

Not allowed unless another international accounting standard allows it

Question 28

IAS 1: Historical cost convention

Answer 28

Assets and liabilities should be recorded at their historic cost: Assets decided at amount of cash/equivalents paid, or fair value of consideration given for them Liabilities recoded at amounts of proceeds received in exchange for obligation

Question 29

Advantage of historical cost accounting

Answer 29

Removed subjectivity of estimating value (of asset/liability) - usually objective evidence for historic cost

Question 30

Reasons for need for regulation

Answer 30

1. Ensures accounts are sufficiently reliable and useful 2. Financial accounts are starting point for taxable profits 3. FS are main document for reporting ti shareholders on condition and performance 4. Stock markets rely on FS 5. International Investors prefer consistent formatting

Question 31

How is accounting regulated?

Answer 31

1. Legislation 2. Accounting concepts 3. Financial reporting standards 4. Generally accepted accounting practice (GAAP) 5. Concept of fair presentation

Question 32

Legislation uk accounts must follow

Answer 32

1. Companies Act 2006 required set format and content 2. Companies must abide by CA06 and accepted accounting standards

Question 33

Accounting concepts help when…

Answer 33

Help where judgement is required e.g. whether to revalue assets

Question 34

Financial reporting standards

Answer 34

Clarify how to account for and present specific items in the financial statements

Question 35

Who sets UK financial reporting standards?

Answer 35

Financial Reporting Council (FRC)

Question 36

Who sets international reporting standards?

Answer 36

International Accounting Standards Board

Question 37

GAAP

Answer 37

Set of accounting practices applied in a given country

Question 38

Concept of fair presentation

Answer 38

IAS 1 requires that info is presented fairly CA06 demands FS give a ‘true and fair view’