12. Regulatory Framework Flashcards
Explain the background of the Companies Act 2006
- Main piece of legislation relevant to financial reporting by companies
- Financial statements must show a true and fair view of the state of affairs of the company and P&L for the period
What does GAAP stand for and what are three main standards under this?
Generally Accepted Accounting Standards
-FRS 100 - sets out overall reporting framework
-FRS 102 - main source of accounting rules for most companies
-FRS 105 - specific accounting rules of Micro Entities
What is the objective of Financial Statements under FRS 102?
- Provide info about financial position and performance of an entity that is useful for economic decision making for a broad range of users
- Show results of stewardship of management (how well company has been run by directors on behalf of shareholders)
FRS 102: what are qualitative characteristics of information in the financial statements?
- Understandability
- Relevance
- Materiality - as info is material, omission or misstatement could influence the economic decision of users.
- Reliability
- Substance over form - transaction/events should be accounted for in accordance with substance not just legal form e.g. for HP, accounts should show the car was an asset from start of contract, with associated amount owed to purchase company
- Prudence
- Completeness
- Comparability
- Timeliness
- Balance between benefit and cost
Explain FRS 102 Financial Position
- Asset
- Liability - present obligation from past events
- Equity - residual interest in assets after deducting liabilities
Explain FRS 102 Performance
Relationship between income and expenses of an entity
1. Income - transactions and events, other than capital contributions from the owners
2. Expenses - costs to and losses of the business other than distributions to the owners
Explain FRS 102: recognition of assets, liabilities, income and expenses
- recognising an item simply means to include in BS or P&L
In order to recognise an asset, liability, income or expense it must:
-meet its definition
-be probably future economic benefit will flow to and from entitity
-have cost/value that can be reliably measured, including use of reliable estimates
Explain FRS 102: Accruals Basis
- entities should prepare financial statements using the accruals basis of accounting
- eligible businesses are allowed to use the cash basis for tax purposes in Unincorporated (sole trader or partnership) if income not over £150,000
What companies are not allowed to use the cash basis?
LLPs, and partnerships where one or more of the partners is a company
Explain FRS 102: offsetting
- not allowed to offset assets, liabilities, income, expenses unless required/permitted by accounting standards.
- Will impact completeness and relevance of information
Explain FRS 102: Going Concern
- management should make an assessment whether the entity is a going concern
- An entity is a going concern unless management intends to liquidate the entity or cease trading or no realistic alternative to do so
-info about the future (at least 12 months) from date of the accounts are are authorised
Explain PROVISIONS under FRS 102: provision and contingencies and three main sections
Provision is a liability of uncertain timing/amount
1. Provisions
2. Contingent liabilities
3. Contingent assets
What is the criteria for when provisions should be recognised?
- entity has an obligation at the reporting date as a result of a past event
-it is probable that transfer of economic benefits will be required to settle the obligation
-reliable estimate can be made of the amount of the obligation
what are contingent liabilities?
Liability that hasn’t met the recognition criteria for provisions - usually because it is possible than probably or cannot be reliably measured
SHOULD NOT be recognised in the accounts but a disclosure note should be included, explaining position to users of the accounts
e.g. company provides guarantee to landlord it will pay it will pay rent owed by tenant if tenant unable to do so.
Likelihood of paying out cash is remote, not recognised and no disclosure note is required
Explain what contingent assets are
-If the inflow of economic assets are uncertain, it is a contingent asset
-Not recognised in the balance sheets along with associated income in P&L account
-if inflow only possible or remote, it is NOT RECOGNISED AND NO DISCLOSURE NOTE is included
