Accounting Principles and Procedures

Question 1

What are the three types of financial statement you may come across relating to a company?

Answer 1

Balance sheets - - statement of the business’s financial position, showing it’s assets and liabilities at a given date (usually at the end of a FY)
Profit and Loss statements - Summary of the business’ income and expenditures transaction. Prepared on annual basis.
Cash flow statements - A cash flow statement summarizes the amount of cash and cash equivalents entering and leaving a company.

Question 2

What is an asset / liability?

Answer 2

Assets are the items your company owns that can provide future economic benefit. Liabilities are what you owe other parties.

Question 3

Can you give me an example of each? (assets / liabilities)

Answer 3

Asset - commercial property for which a tenant pays rent
Liability - a loan, which you pay interest on to the bank

Question 4

What is the difference between financial and management accounts?

Answer 4

Management accounts - are prepared for internal use and are not audited
Financial accounts - is more for external use, to illustrate to the public and investors how the business is performing financially

Question 5

What do you understand by the term Generally Accepted Accounting Principles (GAAP)?

Answer 5

GAAP (generally accepted accounting principles) is a collection of commonly followed accounting rules and standards for financial reporting

Question 6

What are the two types of financial report frameworks

Answer 6

Company law recognises two financial reporting frameworks – IFRS and UK and
Ireland GAAP

Publicly listed companies are required to apply IFRS in the preparation of their group
accounts but may choose between IFRS and UK and Ireland GAAP for the preparation
of their individual parent accounts. Other entities have a free choice between the two
frameworks

Question 7

How do companies know which reporting framework to comply with?

Answer 7

Publicly listed companies are required to apply IFRS in the preparation of their group
accounts but may choose between IFRS and UK and Ireland GAAP for the preparation
of their individual parent accounts. Other entities have a free choice between the two
frameworks

Question 8

Which reporting framework do public limited companies have to comply with?

Answer 8

IFRS for group accounts, but can choose between IFRS and GAAP for individual parent accounts

The individual accounts show the position and the performance of each individual company, but not the group as a whole

Question 9

How would you assess the financial strength of an entity, e.g., for a valuation?

Answer 9

Solvency - ability for a company to meet it’s debt
Liquidity - the amount of cash and easily-convertible-to-cash assets a company owns to manage its short-term debt obligations.

Balance sheet
Profit loss

Question 10

Can you tell me about a common financial measure?

Answer 10

Gross Margin - difference in revenue and cost/total revenue

Question 11

What is the ROCE / working capital ratio / net assets per share?

Answer 11

ROCE - return on capital employed - financial ratio that is used to measure the profitability of a company and the efficiency with which it uses its capital. Put simply, it measures how good a business is at generating profits from capital.

Working capital ratio - dividing total current assets by total current liabilities. For that reason, it can also be called the current ratio. It is a measure of liquidity, meaning the business’s ability to meet its payment obligations as they fall due.

Net assets per share - Net assets per share is usually calculated by dividing net assets (that is, total assets on the balance sheet less total liabilities) by the number of equity shares in issue (excluding any shares held in treasury).

Question 12

Can you tell me what the role of an auditor is?

Answer 12

Role is to determine if the financial statements give a true and fair view of the company’s affairs (independent)

Question 13

When are audited accounts needed and why?

Answer 13

A company must carry out a statutory audit once a year for every year they are not exempt. Most limited companies will need to complete an external audit once they meet any of the two following criteria:

Their turnover is more than £10.2 million
They have total assets totally over £5.1 million
They have more than 50 employees in the business

An audit is important as it provides credibility to a set of financial statements and gives the shareholders confidence that the accounts are true and fair.

Question 14

Difference between a private and public company?

Answer 14

However, the real legal distinction between the two is that public companies are permitted (but not obligated) to offer their shares to the public. In contrast, private limited companies cannot offer their shares to the public at all.

Question 15

What are the difference between PLC and LTD accounts

Answer 15

PLC: PLCs are subject to stricter financial reporting and disclosure requirements compared to LTDs.

They are often required to prepare and publish their financial statements, including the balance sheet, income statement, and cash flow statement, which are accessible to the public and regulators.

PLCs may also need to follow International Financial Reporting Standards (IFRS) or other accounting standards.

LTD: LTDs have less stringent reporting requirements. While they still need to maintain accurate financial records for tax and regulatory purposes, they are not typically required to publish their financial statements for public consumption.

They may follow Generally Accepted Accounting Principles (GAAP) or other applicable accounting standards.

Question 16

Tell me something you understand from the Companies Act 2006.

Answer 16

The companies act 2006 was brought in to:

To simplify the administration of companies.
To improve the rights of company shareholders.
To update and simplify corporate law.
To join the systems of Great Britain and Northern Ireland together.
Originally, there was a further mandate – to transpose EU directives into UK law – but since the UK has left the EU, amendments to the Act have changed this.

The expected duties of company directors’ is laid out in a statutory statement as part of the Act detailing seven general aspects. They are:

To act within their powers as a company director (s171).
To promote the success of the company for the benefit of its members as a whole (s172).
To exercise independent judgement (s173).
To exercise reasonable care, skill and diligence (s174).
To avoid conflicts of interest (s175).
To not accept benefits from third parties (s176).
To declare interesting proposed arrangements or transactions with the company (s177).

Question 17

Tell me what it means to prepare accounts in accordance with IFRS.

Answer 17

Preparing accounts in accordance with International Financial Reporting Standards (IFRS) means following a set of accounting principles and standards that have been developed by the International Accounting Standards Board (IASB).

Question 18

What is the difference between UK GAAP and IFRS?

Answer 18

The primary difference between the two systems is that GAAP is rules-based and IFRS is principles-based. This disconnect manifests itself in specific details and interpretations. Basically, IFRS guidelines provide much less overall detail than GAAP.

Question 19

What is the basis of valuation under IFRS 13?

Answer 19

Fair Value

Question 20

What is fair value?

Answer 20

IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). When measuring fair value, an entity uses the assumptions that market participants would use when pricing the asset or the liability under current market conditions, including assumptions about risk. As a result, an entity’s intention to hold an asset or to settle or otherwise fulfil a liability is not relevant when measuring fair value.

Question 21

What has changed in relation to lease accounting / IFRS 16?

Answer 21

Basically, the changes apply to the accounting treatment for lease agreements. Previously, these were split into finance leases and operating leases. Generally, operating leases were not included on balance sheets but were simply accounted for via profit and loss accounts.

The biggest IFRS 16 change is that now most leased items have to be included as an asset in the company books.

In addition, the lease payments you make on the agreement have to be reported as a lease liability on your balance sheet.

Accounting can be further complicated by the new standard as costs for maintenance, cleaning, etc have to be separated from the main lease payments, if they’re included in them, and reported separately.

Added to these, the depreciation of the asset and interest on the lease liability have to be shown on your profit and loss accounts.

Question 22

When did the change come into effect? (IFRS 16)

Answer 22

September 2016 published. Effective from 1st January 2019

Question 23

What is FRS 102?

Answer 23

FRS 102 The Financial Reporting Standard applicable in the UK

FRS 102 is the principal accounting standard in the UK financial reporting regime. It sets out the financial reporting requirements for entities that are not applying adopted IFRS, FRS 101 or FRS 105.

Question 24

How has changes to FRS 2 impacted upon investment property?

Answer 24

some unlicensed property held by the owner and property leased to another group of companies, are now considered investment property and measured at fair value and revalued at each reporting date.

The rules applied to revaluation of investment property under FRS 102 are straightforward and simply require any changes on revaluation to be recognised in profit and loss, rather than revaluation reserve. In this case, movements in fair value of investment properties are not taxable. Instead, a deferred tax cost in profit and loss, and provision for deferred tax in the balance sheet, are recognised. It is only the disposal of the investment property that will give rise to a realised chargeable gain.

Question 25

What are statutory accounts?

Answer 25

Statutory accounts – also known as annual accounts – are a set of financial reports prepared at the end of each financial year. In the UK, all public limited companies (Plc), private limited companies (Ltd), and limited liability partnerships (LLP) are required to submit them

Must include:

Balance sheet
P/S sheet
Cash flow statement

Question 26

Tell me three ways you ensure that clients’ money is handled properly.

Answer 26

I don’t have experience in handling client money, but I understand that I would need to:

• ensure client bank accounts are clearly labelled ‘client’
• ensure that client and office money does not mix
• ensure a client has access to their monies on demand

Question 27

What RICS guidance or Schemes do you adhere to in doing so? In regard to handling client money

Answer 27

RICS Professional Statement Client Money Handling 2019 (effective 1st January 2020)

Question 28

Explain your understanding of the VAT domestic reverse charge for building and construction services.

Answer 28

In a nutshell, from 1st March 2021, the reverse charge means that a subcontractor in the CIS scheme will not charge VAT on its invoices to a VAT-registered contractor in the CIS scheme. Instead, the contractor will account for the VAT in their VAT return as both Output (sales) VAT and as Input (purchases) VAT

Question 29

When do changes to the reverse charge apply from?

Answer 29

1 March 2021

Question 30

What is the impact of the reverse charge on VAT accounting?

Answer 30

The reverse charge mechanism is a tax regulation used in Value Added Tax (VAT) systems in many countries. Its primary purpose is to shift the responsibility for reporting and remitting VAT from the supplier to the recipient of goods or services in certain transactions

Shifts Tax Liability: Under normal VAT accounting, the supplier is responsible for charging, collecting, and remitting VAT to the tax authorities. With the reverse charge mechanism, this responsibility shifts to the recipient. This means that the recipient is both the buyer and the tax collector.

Impact on Cash Flow: The reverse charge can have an impact on cash flow for businesses. Recipients need to pay the VAT directly to tax authorities, which can affect their liquidity. However, they can also claim this amount as input VAT (if they are entitled to it) on their VAT returns.

Question 31

Is VAT included in a balance sheet or a profit & loss account?

Answer 31

Value Added Tax (VAT) is neither included in a company’s balance sheet nor its profit and loss (P&L) account as a revenue or expense item. VAT is a consumption tax collected and remitted by businesses on behalf of tax authorities

Question 32

How do you account for the impact of inflation when reporting to clients?

Answer 32

Open and honestly with transparency

I often undertake sensitivity analysis, informed by market research such as forecast house prices and build cost indexes to assess the impact of inflation on an appraisal.