Accounting, Accounting Systems and users´ needs Flashcards
What is Accounting?
The provision of figures about the performance and the financial position of an entity. It tells people (1) what they have got, (2) what they used to have, (3) the changes in what they have, (4) what they may get in the future
Who are the users of financial reporting information and what are their information needs? And which accounting rules are best suited to address these needs?
I cant actually gain car suppliers because they are the users of the financial reporting information.
- Investors; Investment Potential; true and fair view
- Creditors; financial stability; prudence principle
- analysts; forecasts; depth and complexity
- government; taxation base; accounting profit
- competitors; benchmarking; comparable information
- suppliers; relationships; going concern prognosis
Are there any problems regarding the needs of the users of the financial reporting information?
- Info is forward looking
- different users require different info for the same items
- different users require different degrees of complexity and depth
- not all info required is likely to be included in financial accounts
What are Conventions?
An accounting convention consists of the guidelines that arise from the practical application of accounting principles; not legally binding, unless specifically required.
Name examples of conventions.
- Business entity = decides which entity has to create the report
- Materiality = only material facts should be included in fin. statements
- Matching = expenses should be always matched to benefits
- Continuity = going concern, having enough resources to keep operating
- Conservatism = prudence principle; current assets are valued at cost or at market price, whichever is less
Why are there different accounting systems?
Because an accounting system is influenced by four major fields which vary from country to country.
- Legal Law: Common Law -> accounting standard setting process is often in the hands of a private standard setter & Code Law -> accounting standard setting process is often in the hands of the government
- Tax Law: Accounting Profit is used as taxation base
- Providers: Different providers of finance (creditors vs. equity) are the key cause of differences in financial reporting -> equity financing: shareholder oriented countries provide information to investors; -> debt financing: credit oriented countries, creditors and state receive private information about the financial situation of a company
- History, culture, other socio-economic factors
What is IFRS and what is included?
IFRS = International Standard Financial Reporting Standards
IFRS are standards and interpretations published by the IASB (International Accounting Standards Board). The overall objective of IFRS is to provide financial information about the reporting entity.
Included are:
- CF = Conceptual Framework; the theoretical foundation, defines objectives and underlying assumptions
- IFRS = Certain specific accounting rules on different issues;
- Interpretations
In addition:
- AG = Application Guide
- IG = Implementation Guide
- IE = Illustrative Examples
- BC = Basics for Conclusion
What are the characteristics of IFRS?
- Reporting Entity: IFRS focuses on accounting for the economic entity rather than the legal entity; Single vs. consolidated financial statements (=IFRS usually consolidated)
- Preparers: In the EU, IFRS are applied mandatorily for the preparation of consolidated financial statements
- General vs. Industry specific: IFRS are developed to be applied to every entity within any industry; no industry specific standards
- Accounting Standard Setter: IFRS are exclusively developed and published by the IASB
- Auditing Rules: Even though published IFR reports usually have to be audited, IFRS do not contain any auditing rules
- Publication Rules: IFRS do not contain any rules for the publication of IFRS reports
What are the fundamental qualitative and enhancing characteristics of IFRS?
The 2018 IASB Conceptual Framework is based on the idea that qualitative characteristics help identify the types of financial information that are likely to be most useful to existing and potential investors.
Para. 2.4ff: relevant and faithful
Hence, the framework distinguishes the qualitative characteristics from the enhancing characteristics
Para. 2.23ff: comparability, verifiability, timeliness, understandability
What are the elements of the financial statements?
two financial statements: Balance sheet and the Income Statement
Balance Sheet / Statement of financial position:
Assets, Liabilities, Equity
Income Statement / Statement of comprehensive Income:
Income, Expenses
What are assets?
An asset is a present economic resource controlled by the entity as a result of past events (Para. 4.3 + 4.4)
Current assets: likely to undergo some transaction, usually within 12 months
Non-current assets: asset that a firm intends to use within the business over an extended period (over 12 months)
What are liabilities?
A liability is a present obligation of the entity, arising out of past events and the obligation is to transfer an economic resource.
Current Liabilities: the debts that a business expects to pay within 12 months
Non-current Liabilities: Liabilities held on longer than 12 months
What is equity?
Para. 4.63;
assets - liabilities = equity
What is income?
Para. 4.68; income increases assets and decreases liabilities, it comprises revenue and gains.
What are Expenses?
Expenses increase liabilities.
The Framework´s definition of expenses encompasses losses as well as expenses that arise in the course of the ordinary activities of the entity.
