3 - Accounting standards Flashcards
What is the relationship between the conceptual framework and accounting standards?
Standards abide by the principles laid down by the framework but standards trump frameworks when the two conflict.
What is faithful representation?
Faithful representation is a leading principle of the Conceptual framework and means the books and accounts should accurately and neutrally reflect the economic reality of the firm in all respects.
What do international accounting standards prescribe for the recording of liabilities?
They must result from a contractual obligation or a highly likely adverse result of lawsuits or negotiations in lieu of them.
The liability must be measurable and any discount rate applied to future liabilities must be justified.
What do accounting standards require for consolidated accounts when reviewing subsidiaries, associates and entities not formally owned by the group parent company?
If, as a matter of fact, the parent can direct the business decisions of the entity, the entity must be consolidated, even if no shares are held in it.
Why do some intangible assets get recognised and disclosed in accounting reports but most do not?
Most cannot be isolated and estimated or measured but some intangibles are purchased and the cost of the asset is treated as if it was the value of the intangible.
With goodwill, a subsidiary or associate is purchased for more than fair book value and the excess is deemed to be goodwill.
How does goodwill arising on consolidation get valued in the financial reports?
Initially as the cost minus the fair value of all the investees’ net assets but thereafter it should reduce by way of impairment as the investment’s true value becomes apparent and the initial payment seems to have been an overpayment – in many cases, at least.
In an economy where corruption and fraud are well above international average rates, would principle-based standards or rule-based standards be better for honest investors to use?
In a culture where there are widespread corruption and dishonesty, why would an investor prefer rule-based standards to principle-based standards?
In a corrupt economy, the honest investor wants to use accounts that give dishonest preparers minimum scope for manipulation and distortion, so will prefer a rules-based over a principles-based set of standards.
The corrupt environment is unsuitable for a principles-based set of standards as the accountants could not be trusted to exercise their judgment with integrity so the principles applied would be manipulated, distorted and subverted.
Even in a rules-based environment, fraud can still occur but the risks of manipulation are higher in a rules-based environment than in a principles-based one from the viewpoint of the preparer, so the honest reader will prefer such an approach to accounting standards in that environment.
