12 - Regulatory Framework Flashcards
Companies Act 2006 says companies must prepare which documents annually?
- Financial statements (accounts), comprising of a BS and a P&L a/c
- Additional info in notes section (disclosures)
Must show a true and fair view of state of affairs of co. and P&L for period
Give 2 examples of accounting standards which must be followed (i.e. mandatory)?
- IRFS (International Financial Reporting Standards) - for EU. Both for main stock market & Alternative Investment Market. Usually v. large companies
- UK GAAP (generally accepted accounting principles) - highly significant changes, mandatory for all companies. Businesses must calculate profit for tax purposes on a basis which complies with GAAP
What are the main standards contained in UK GAAP?
- FRS 100 - sets out all reporting framework
- FRS 102 - main source of accounting rules for most companies
- FRS 105 - specific accounting rules for micro entities
What are the purposes of accounting standards?
Outline accounting practice which company is expected to follow for a particular transaction/event.
Financial statements which comply with accounting standards generate a common understanding between users and preparers of financial statements on how particular items have been treated.
From FRS 102, what is the objective of financial statements?
Provide info about the financial position and performance of an entity that is useful for economic decision making for a broad range of users e.g. buy or sell shares, whether to make a loan to the business
Also show the results of stewardship of the management i.e. how well directors have run the company on behalf of the shareholders
From FRS 102, what are 10 qualitative characteristics of information in the financial statements?
- understandability - presented so someone w reasonable knowledge can understand
- relevance - need info relevant to make economic decisions
- materiality - if its omission/misstatement could influence the economic decision of users. Director’s remuneration often considered material by nature rather than by amount
- reliability - free from material error and bias and presented neutrally
- substance over form - transactions accounted for and presented in accordance with their substance and not merely their legal form (i.e. include a car at the start of a hire purchase contract)
- prudence - when there’s uncertainty. Degree of caution so assets and income not overstated/liabilities and expenses not understated. Should be unbiased
- completeness
- comparability - should be able to compare a/c’s of same entity over time and compare different entities. Should be consistent year on year
- timeliness - otherwise affects relevance if late
- balance between benefit and cost - benefit derived from info should exceed cost of providing it
From FRS 102, what is included in the statement of financial position?
- asset - controlled by entity, future economic benefits (e.g. credit sale [past event], hence expect cash from a debtor [future econ benefit], debtor = asset; co. buys machines [past], make goods to be sold [future econ benefit], machine = asset)
- liability - present obligation from pasr events, expect outflow of econ benefit to entity
- equity - residual interest in assets after reducing liabilities, i.e. net assets of entity
From FRS 102, what is performance and how is it measured?
relationship between income and expense
* income - transactions and events that increase equity, other than capital contributions, includes revenue and gains. Revenue = gains in ordinary course of business, includes sales, interest, receivables etc. Gains = other income, not revenue
* expense - costs to and losses of business, other than distributions to owners (drawings/dividends)
From FRS 102, what must be recognised in a balance sheet or profit and loss account?
- must meet the definition of an asset, liability, income or expense
- must be probable that future economic benefit will flow to or from entity
- item must have a cost/value that can be reliably measured (including using reliable estimates)
From FRS 102, what must be recognised in a balance sheet or profit and loss account?
- must meet the definition of an asset, liability, income or expense
- must be probable that future economic benefit will flow to or from entity
- item must have a cost/value that can be reliably measured (including using reliable estimates)
From FRS 102, most businesses must use what basis of accounting?
accruals (some exceptions can use cash)
From FRS 102, what are the rules surrounding offsetting?
can’t offset assets and liabilities, or income and expenses, unless required or permitted by accounting standards, as causes both figures to be understated
From FRS 102, what are the rules surrounding going concern?
management should make an assessment if entity is a going concern. Entity is going concern unless management intends to liquidate entity or cease trading, or has no realistic alternative but to do so. Management should take into account all available information about the future, at least 12 months from date accounts are authorised
What is a provision and from FRS 102, when should it be recognised?
provision = liability of uncertain timing or amount. Should be recognised (i.e. liability put onto BS and expense in P&L account) when:
* entity has an obligation at the reporting date as a result of a past event
* probably transfer of economic benefits will be required to settle obligation
* reliable estimate can be made of amount of obligation
e.g. company carrying out drainage activities committed to make good damage to fencing cause by laying drains. Damage already caused by laying of drains (past event) it will cost money to repair (probably transfer of econ benefit), should be able to get a quote for cost of work (reliable estimate)
What is a contingent liability from FRS 102, and how should it be treated in accounts?
Hasn’t met recognition criteria above, either because it’s possible rather than probable, or cannot be reliably measured. Shouldn’t be measured in accounts, disclosure note should be included explaining position to users of accounts.
e.g. company provided guarantee to third party (landlord) it’ll pay rent owed by tenant if tenant unable to do so. Amount can be reliably measured, only possible that 3rd party will not pay rent rather than probable. Users would like to know this so note included.
