Week 2

Question 1

What is the Role of the Regulatory Framework?

Answer 1

To ensure Finance Reporting is regulated through Financial Reporting Standards. IFRS, UK GAAP, US GAAP

To ensure financial information is reported objectively to provide relevant, reliable and faithfully represented information.

To provide adequate minimum level of information

To ensure financial information is comparable and consistent.

To improve transparency and credibility of financial reports.

Question 2

Explain the difference between Rule v Principles Based Systems with examples of each

Answer 2

Rule Based – Rules are designed to cover every aspect of reporting
e.g: US GAAP system.

Principles Based – It uses a ‘conceptual framework’ to provide an underlying set of principles within which standards are developed.
e.g: IFRS system

Question 3

Names advantages of the rule based system and the principle based system

Answer 3

Rule based system minimises the exercise of subjective judgement. So there is less scope for controversial arguments.

Principle based system allows flexibility

Question 4

List the disadvantages to the rule based system

Answer 4

A rigid regulatory system will have detrimental effect in the long term.

Political , economical and social differences of different countries are ignored.

Arbitrary valuations are possible.

Rigid standards remove the need for judgements.

Does not provided precision and comparability.

Increased complexity.

Question 5

What does the the IASB conceptual framework covers?

Answer 5

ROMPACCE

the objectives of financial reporting;

the underlying assumptions;

the qualitative characteristics;

the elements of financial statements;

the recognition (and derecognition) of the elements;

the measurement of the elements; and

The presentation of the disclosure of the financial statements

the concepts of capital and capital maintenance.

Question 6

What are the advantages of IFRS system?

Answer 6

Financial statements presented under IFRS make global comparisons easier.

Cross-border listing is facilitated, making it easier to raise funds and make investments abroad.

Multinational companies with subsidiaries in foreign countries have a common, company-wide accounting language.

Foreign companies can be more easily appraised for mergers and acquisitions.

Multinational companies benefit for the following reasons: – preparation of group financial statements may be easier; – a reduction in audit costs might be achieved; – management control would be improved; and – transfer of accounting knowledge and expertise across national borders would be easier

Question 7

Disadvantages of IFRS System

Answer 7

CLEED

cost of implementing

lower level of detail in IFRS.

Issues with litigation for US accountants due to it being principle based and subjective with application of Judgement. Removed defence of sticking to the rules

challenges in adopting IFRS in emerging economies, including – the economic environment; – incompatible legal and regulatory environments; – concern around SMEs; – level of preparedness; and – education needs of auditors

Question 8

What are the barriers to Global Harmonisation?

Answer 8

T-FLIP

Legal system: this affects the accounting standardisation process – such as whether the legal system is based on common law or code law. The differences in the legal system can restrict the development of certain accounting practices.

Business financing and accounting practices: decision-making processes regarding arrangement of funds may include accounting practices. Many countries do not have strong independent accountancy or business bodies which would press for higher standards and greater harmonisation.

Tax system: a country’s tax system is very influential, particularly in terms of its connection with accounting. In most countries, tax authorities may influence the accounting rules around recording of revenues and expenses.

Level of inflation: this is likely to influence valuation methods for various types of assets.

Political and economic relationships: while Commonwealth countries may share similarities in their accounting and tax systems, cultural differences may still result in accounting systems differing from country to country. War etc.

Question 9

Which companies must use IFRS?

Answer 9

Listed companies – must adopt IFRS

Non-listed Companies - Choice between IFRS or UK GAAP.

3 major FRS – FRS 100, FRS 101, FRS 102.

Question 10

What does FRS 102 cover?

Answer 10

This standard is the standard based on IFRS for Small and Medium enterprises.

Question 11

What determines the size of a company?

Answer 11

Small:
Turnover 632000< <10.2m
Total Assets 316,000< <5.1m
No of employees 10< <50

Medium
Turnover: 10.2< <36m
Total Assets 5.1< <18m
No of employees 50< <250

Question 12

What are the differences between IFRS and FRS 102

Answer 12

There are 11
*find this out

Question 13

What is the IASB Conceptual Framework

Answer 13

A conceptual framework is a statement of generally accepted theoretical principles.

It is the underlying basis of the framework for the preparation and presentation of financial statements.
That framework in turn provide reliable and relevant information about the business.

These theoretical principles provide the basis for the development and evaluation of new and existing accounting standards.

The framework forms the theoretical basis for determining which events should be accounted for, how they should be measured and how they should be communicated to users.

Question 14

What is the purpose of Conceptual Framework

Answer 14

to assist the IASB in the development of future IFRS.

to provide a basis for reducing the number of alternative accounting treatments permitted by IFRS

to assist national standard setting bodies in developing national standards to assist preparers of financial statements in applying IFRS

to assist auditors in forming an opinion as to whether financial statements comply with IFRS

to assist users of financial statements in interpreting the financial statements prepared in compliance with IFRS

to provide those who are interested in the work of the IASB with information about its approach to the formulation of IFRS

Question 15

What is the Objective of general purpose financial reporting

Answer 15

The objective of general purpose financial reporting is ‘to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders and other users in making decisions about providing resources to the entity’.

Question 16

Under the IASB Conceptual Framework, what are the Qualitative Characteristics of financial information

Answer 16

Fundamental qualitative characteristics * relevance * faithful representation

Enhancing qualitative characteristics: * comparability * verifiability * timeliness * understandability

Question 17

Describe what Faithful representation means ad part of the qualitative characteristics

Answer 17

Faithful representation means that financial information must meet three criteria: completeness, neutrality and be free from error.

Completeness: all information that users need to understand the item is given.

Neutral or unbiased: there is no bias in the selection or presentation of information.

Free from error: there are no omissions, errors or inaccuracies in the process to produce the information.

Question 18

What does the Going Concern Concept mean?

Answer 18

The entity will continue in operation for the foreseeable future

Question 19

Names the elements of financial statements

Answer 19

Assets - An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce future economic benefits.

Liabilities - A liability is a present obligation or duty of responsibility of the entity to transfer an economic resource as a result of past transactions or events that the entity has no practical ability to avoid.

Equity - This is the ‘residual interest’ in the assets of the entity after deducting all its liabilities.

Income - Income is increases in assets or decreases in liabilities that result in an increase in equity, other than those relating to contributions from holders of equity claims.

Expenses - Expenses are decreases in assets or increases in liabilities that result in a decrease in equity, other than those relating to distributions to holders of equity claims.

Question 20

What does Recognition in relation to financial statements?

Answer 20

An item needs to meet the definition of an asset, a liability or equity to be recognised in the statement of financial position.

Likewise, an item needs to meet the definition of income or expenses to be recognised in the statement of profit or loss and OCI.

In addition to meeting the definition of an element, items are only recognised when their recognition provides users of financial statements with information that is both relevant and a faithful representation of the element being represented

Question 21

What does Derecognition mean in relation to financial statements

Answer 21

Derecognition is the removal of all or part of a recognised asset or liability from an entity’s statement of financial position.

Asset: derecognition of an asset occurs when the entity loses control of all or part of the recognised asset.

Liability: derecognition of a liability occurs when the entity no longer has a present obligation for all or part of the recognised liability.

Question 22

What are the objectives of General Purpose Financial Reporting

Answer 22

to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders and other users.

Helps in predicting future returns of the company and the strengths and weaknesses of the entity.

Question 23

What is the prudency concept?

Answer 23

Exercise of caution when making judgements under conditions of uncertainty.
Be neutral - do not overstate assets and income
- do not understate liabilities and expenses

Question 24

Explain the term ‘Substance over form’ with examples.

Answer 24

• the financial statements and disclosures should reflect the underlying realities of accounting transactions.
• preparers should exercise judgement and present the transactions in a manner to reflect their true sense.

Examples:

Sale and leaseback
Consignment stock
Factoring
Sale and repurchase agreements

Question 25

What is the concept of Going Concern?

Answer 25

The entity will continue in operation for the foreseeable future.

Question 26

Name the five elements of financial statements?

Answer 26

1. Income: Increase in assets or decrease in liabilities that results in an increase in equity other than…..
2. Expense : Decrease in assets or increase in liabilities that results in a decrease in equity other than…..
3. Asset : A present economic resource controlled by an entity as a result of past economic events.
4. Liability : A present obligation or duty of responsibility to transfer an economic benefit as a result of past transactions or events that the entity has no practical ability to avoid.
5. Equity : The residual interest in the assets of the entity after deducting all its liabilities.

Question 27

What elements are in the Income Statement

Answer 27

Income and expenses

Question 28

What elements make up the Statement of Financial Position

Answer 28

Equity, Assets and Liabilities

Question 29

Define historical cost?

Answer 29

Historical cost of an asset is the price paid or cost incurred to acquire or create the asset.

The historical cost of an asset is reduced to show any consumption of the asset or any impairment to the value.

Standards including guidelines for initial recognition of assets:* IAS 16 * IAS 38 * IAS 40

It is the most popular way to measure elements with the financial statement.

Question 30

Define Fair Value?

Answer 30

This is a way to measure elements with the financial statements.

Fair value of an asset: market participants’ current expectation of the amount to be received in a sale in an orderly transaction.

Fair value of a liability: market participants’ current expectation of the amount to be paid to transfer a liability in an orderly transaction.

Question 31

What are the two concepts of capital maintenance?

Answer 31

1. Financial concept of capital maintenance
2. Physical concept of capital maintenance

Question 32

What is the Physical concept of capital maintenance?

Answer 32

Capital is regarded as its production capacity.

Profit is earned only if the production capacity at the end of the year exceeds the production capacity at the beginning of the year excluding any distributions to or contributions from the owners.

Question 33

What is the financial concept of capital maintenance?

Answer 33

Capital is linked to the NET ASSETS of the company.

Net Assets = Assets - Liabilities So Net Assets = Equity

Profit is earned only if ……
Money financial capital maintenance
Real financial capital maintenance

Question 34

What are the components of the annual report and accounts

Answer 34

The Strategic Report
Directors’ Report
Directors’ Remuneration Report
Corporate Governance Report
Auditor’s Report
Audited Financial Statements
i Statement of Financial Position
ii Statement Of Profit or Loss and OCI
iii Statements of Changes in Equity
iv Statement of Cash flows and
Notes to the financial statements

Question 35

Describe the Strategic Report or Business Review

Answer 35

The strategic Report is written in non-financial language.

It provides clear information about the company’s activities, performance, position, strategic position and probable risks of the business.

It is aimed at a wide range of users.

All companies except small and micro companies must produce a strategic report.

In case of group financial statements, the Strategic Report must be a Group Strategic Report.

Question 36

What is the purpose of the strategic report?

Answer 36

Purpose- to provide information to the members of the company and help them assess how the directors have performed their duties and functions.

Question 37

What is the contents of the Strategic Report?

Answer 37

Fair View – A balanced and comprehensive analysis of the company’s business

• The performance and development of the company’s business during the financial year, including analysis using financial key performance indicators (KPIs). Large companies should also include non-financial KPIs
• The position of the company’s business at the end of that year.

Description of the principal risks and uncertainties the company faces These may include any risks and uncertainties that have affected the company’s business

Going Concern – If an event has affected the going concern

It should include references to the financial statements where necessary.

Additional information for quoted companies:
a description of the company’s strategy
* a description of the company’s business model
* information on environmental, employee and social issues, including human rights and gender diversity information when material

Question 38

What is included in the Notes section of the accounts

Answer 38

Notes are presented in the order of:
Statement of compliance with IFRS -

Measurement of bases ; summary of significant accounting policies .

Supporting information in the same order as each statement and each line item.

Other disclosures
– Contingent liabilities IAS 37
– Non-financial disclosures to evaluate FRM
objectives and policies.
– Dividends not recognised
– Capital disclosures
– Any missing information

Question 39

What is included in the Directors Report?

Answer 39

Directors Remuneration

include other information

Question 40

What is segment reporting?

Answer 40

Provides financial information regarding the
financial position and performance of the
key operating segments of a company.

Could be based on products or geographical areas.

Particularly applicable to large enterprises
i) that produce a diversified range of products
and services.
ii) have a number of business lines and
operations.
iii) Often operate in different geographical
areas or countries.

Question 41

what is the segment reporting definition in IFRS 8

Answer 41

Operating segment of a business entity
from which it may earn revenues and
incur expenses

regular review of resource allocations by
CODM.

for which discrete financial information
is available.

Question 42

What are the IASB Guidelines -3 Key Standards

Answer 42

IAS 8

IFRS 15 - Revenue

IFRS 16 - Leases

Question 43

What are the required Disclosures for Operating Segments

Answer 43

Disclosures must include:

• how the entity has identified operating segments and their general nature;
• the information on operating segment assets and liabilities and profits and losses, if presented regularly to the CODM and measured in a different way to the primary or main statements;
• reconciliations of amounts disclosed by segments to the totals within the financial statements; and
• any change in the internal structure of the entity with the new and old segment information

Question 44

What are the Thresholds for IFRS 8 Segment reporting?

Answer 44

More than 10% of overall gross revenue (including inter-segment sales).

The absolute amount of the segments reported profit or loss is 10% or more of the greater (in absolute amount) of :
- the combined reported profit of all segments that did not report

a loss
- the combined reported loss of all segments that did not report a

profit
More than 10% of the combined assets value.

Must be in total at least 75% in total