7. FR and Conceptual Framework Flashcards
What is financial reporting regulation?
Regulation that UK-registered companies have to comply with.
I.e. Companies Act 2006 and Financial Reporting Standards/IFRS.
How do we select the appropriate financial reporting standards?
Listed: IFRS Accounting standards issued by International Accounting Standards Board (IASB)
Non-listed: Choice of UK FRS issued by Financial Reporting Council or IFRS
What are the financial reporting requirements of the CA 2006?
- Keep adequate accounting records
− Must contain details of all cash receipts and payments and record of all assets and liabilities of the company
− If has any inventories, list of inventories held at end of financial year and all inventories sold and purchased
− Private company, must keep for 3 years from the date on which they are made
− Public company, must keep for 6 years from the date on which they are made. - Determine an appropriate accounting reference date.
- Prepare financial statements
− The CA 2006 requires financial information to be prepared by the directors and sent to the shareholders to fill the information gap
− The information gap can be defined as the difference in knowledge of the company’s affairs between the stewards of the company (the directors) and the owners of the company (the shareholders). - Prepare directors’ and strategic reports
− The directors’ report for a financial year must state:
▪ The names of the persons who, at any time during the financial year, were directors of the company
▪ The amount (if any) that the directors recommend should be paid by way of dividend, unless the company is entitled to an exemption from this disclosure due to its size
▪ The directors’ report must be approved by the board of directors and signed on behalf of the board by a director or the secretary of the company.
− Some companies are required by CA 2006 to prepare a strategic report. The purpose of the strategic report is to inform shareholders and help them assess how the directors have performed their duty to promote the success of the company. The strategic report must contain:
▪ A fair review of the company’s business
▪ A description of the principal risks and uncertainties facing the company - File financial statements within a set time period
− File with Registrar of Companies at Companies House
▪ For a private company, 9 months after the end of the relevant accounting reference period.
▪ For a public company, 6 months after the end of that period.
What is the difference between a public company and a private company?
Public company - offers shares to public (private can’t)
Public has PLC and Private has LTD
Public must be quoted or listed on stock ex. Private can be owned by founders, management/group of investors
Public can have thousands of shareholders. Private can be the same and be larger than a public
Not all Public companies are listed on stock exchanges.
What do we mean by the concept of ‘true and fair’?
‘True and fair’ concept requires additional material information beyond accounting standards, involving professional judgment.
What is the role of the IASB?
They are an independent standard-setting body that develops and issues international accounting standards (IFRS Accounting Standards).
What is the difference between accounting standards and interpretations?
Accounting standards are how transactions/events should be reported. Interpretations are additional guidance where there may be ambiguity over how to apply it.
Thus, can be IFRS/IAS Standards and then IFRIC and SIC interpretations.
Interpretations provide additional guidance and context where there is ambiguity over how to apply a particular accounting standard.
− Interpretations that are labelled IFRIC Interpretations:
▪ The IASB interpretations are developed by a subcommittee called the IFRS Interpretations Committee (IFRIC ®) and are issued and approved by the IASB.
− Interpretations that are labelled SIC Interpretations:
▪ The Standard Interpretations Committee (SIC ®) was the predecessor body to the IFRS Interpretations Committee. There are still some SIC Interpretations in issue.
What is FRS 102?
FRS 102 is The Financial Reporting Standard applicable in the UK and Republic of Ireland. FRS 102 is based on the IFRS for Small and Medium-sized Entities.
The disclosure requirements or FRS 102 are significantly reduced compared to full IFRS Accounting Standards.
What is the role of the FRC?
The Financial Reporting Council (FRC) is the accounting standard-setter in the UK.
After the IFRS Accounting Standards were adopted for all listed companies in the European Union, the FRC created a new set of UK accounting standards, which are broadly based on IFRS Accounting Standards.
Why is compliance with financial reporting regulations important?
To ensure that the information contained in the reports presents fairly the financial position, the financial performance and the cash flows of an entity.
Due to many individuals who rely on that information.
How is compliance with financial reporting regulation monitored in the UK?
External statutory audits mainly.
The auditor will raise any issues with the company directors
during the audit process, so that the directors can make changes to the financial statements to comply with the financial reporting regulations. If changes are not made, the auditor would give a ‘negative’ audit opinion to the shareholders.
What is the Conceptual Framework and why is it useful?
The IASB’s Conceptual Framework is a comprehensive set of concepts that underline the preparation and presentation of financial statements.
Useful in mainly 3 ways:
1. Helps standard setters e.g. IASB develop IFRS standards
2. Helps users to understand the IFRS Accounting standards
3. Helps preparers of the FS apply accounting policies consistently where there is no standard that applies.
How are accounting standards and the Conceptual Framework applied in practice?
- If a standard exists for a particular accounting issue, we must apply that standard e.g. standards set by the IASB before CF was made.
- Where no particular standard exists that resolves the accounting problem, we use the principles outlined in the Conceptual Framework
What are the fundamental qualitative characteristics of useful information under the Conceptual Framework?
If financial information is to be useful, it must be relevant and faithfully represent what it purports to represent.
Relevance and faithful representation are the fundamental qualitative characteristics.
- Relevance:
a) Predictive value; and/or
b) Confirmatory value. - Faithful Representation
a) Complete,
b) Neutral; and
c) Free from error.
What are the four ‘enhancing’ qualitative characteristics of useful information under the Conceptual Framework?
- Comparability: Information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date.
- Verifiability: different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.
- Timeliness: means having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older the information is, the less useful it is.
- Understandability: Classifying, characterising and presenting information clearly and concisely makes it understandable
