Campbells notes - P1 - C1&2 - Accouting Regulations and Stds

Question 1

1. Who are the standards designed to protect?

Answer 1

Companies are owned by Shareholders but managed by a Board of Directors. Other Stakeholders include employees, suppliers, customers, government, and public. Each suffers in different ways if a company fails.

Question 2

What are the two types of regulation and in what circumstances do they apply?

Answer 2

There are two types of regulations.

a. UK GAAP ( Generally Accepted Accounting Principles)

b. IFRS (International Financial Reporting Standards – IAS and IFRS)

Under EU rules, any company whose shares are traded on a recognised stock exchange must comply with International Accounting Standards.

Unlisted companies may also choose to comply with IAS however once they comply, they cannot revert to UK Standard.

Companies whose shared are not traded (unlisted companies) can comply with UK Standards.

Question 3

UK GAAP

There are 5 key financial reporting standards. What are they?

Answer 3

1. FRS101 – Reduced Disclosure Framework
2. FRS102 – Financial Reporting Standard
3. FRS103 – Insurance Contracts (unlikely to be part of exam – just be aware of in passing)
4. FRS104 – Interim Financial reporting
5. FRS105 – Micro Entities (need to be aware of for exam)

Question 4

UK GAAP
Give a brief description of FRS101 – Reduced Disclosure Framework.

Answer 4

This applies to Companies that apply the recognition and measurement principles set out by International Accounting Standards. However, exemptions are available as the disclosure requirements are demanding.

Examples of exemptions available:
1. Cash flow statements
2. Management personnel remuneration and transactions with parent companies and wholly owned subsidiaries
3. Comparative reconciliation for property, plant, and equipment

Question 5

UK GAAP
Give a brief description of FRS102 – Financial Reporting Standard.

Answer 5

FRS 102 applies to most medium and small business entities that do not follow International Accounting Standards. FRS 102 replaces most of the regulations set out under UK GAAP. The standard allow for reduced disclosures requirements when presenting financial statements.

Examples of exemptions are:
1. Cash flow statements
2. Financial instruments disclosures (not really part of syllabus – debenture converted to a share at a later date)
3. Share based payment disclosures (Settling liabilities or making payments in shares)
4. Key management compensation (unless required for Directors under company law)

Question 6

UK GAAP
Give a brief description of FRS103 – Insurance Contracts (unlikely to be part of exam – just be aware of in passing)

Answer 6

Applies to companies who:
1. Issue insurance companies
2. Provide re-insurance contracts (insurers spreading risk by re-insuring their risk with other insurers)
3. Holds financial instruments where there is a discretionary participation features e.g., the issuer controls the timing of the contract

Question 7

UK GAAP
Give a brief description FRS104 Interim Financial reporting.

Answer 7

A company may issue an interim financial report. FRS 104 lays down the minimum disclosures without the need of repeating information already contained in the Annual Report sand Accounts.
“Timely and reliable interim financial reporting can improve the ability of investors, creditors, or others to understand and entity’s capacity to generate earnings and cash flows and its financial position and liquidity. This FRS sets out content, recognition, and measurements principles, for interim financial reports)

Interim financial reports provide an update on the most recent set of annual financial statements. It focuses on

1. New activities and events
2. It does not duplicate information previously reported
3. FRS104 does not prohibit publication of a complete set of financial statements
4. Minimum components of an interim financial report should include:
5. A condensed statement of financial position
6. A condensed profit statement
7. A condensed statement of changes in equity
8. A condensed stamen of cash flow
9. Selected explanatory notes

Question 8

UK GAAP

Give a brief description FRS105 Micro Entities (need to be aware of for exam)

Answer 8

Conditions for micro entity, small, medium, and large mentioned in text.

To be a micro entity, you must meet two of the following conditions:
1. Revenue less than £632,000 pa
2. Maximum Net Assets £316,000
3. Maximum average number of staff = 10

Micro entities do not have to report as much financial information as larger companies.

Small companies must meet two of the following conditions:
1. Revenue less than £10.2 million
2. Maximum Net Assets £5.1 million
3. Maximum average number of staff = 50

Medium companies must meet two of the following conditions:
1. Revenue less than £36 million
2. Maximum New Assets £18 million
3. Maximum average number of staff = 250

Large companies – Any company which does not meet the criteria to be a micro – entity, small or medium sized company. They are also required to prepare and file full accounts.

Question 9

State the meaning to the following abbreviations:

GAAP
FRC
IASB

Answer 9

State the meaning to the following abbreviations:
1. GAAP - Generally Accepted Accounting Practices
2. FRC – Financial Reporting Council
3. IASB – International Accounting Standards Board

Question 10

Give 3 reasons to why it is an advantage to a company to report minimum financial information.

Answer 10

1. Costs and time – less work in preparing accounts, therefore less time and costs involved in preparation.
2. Higher audit costs – the more information that is required to be produced = the more time (and costs) that auditors will require to verify and check the information.
3. Privacy / Competitor Advantage – Information can be helpful to competitors. A small business may not be able to withstand commercial pressure from larger rivals

Question 11

Conceptual Framework

The IASB sets out 2 fundamental qualitative characteristics of financial statements. What are they and give a brief explanation.

Answer 11

1. Relevance – the financial information must be able to affect the decisions made by stakeholders
2. Faithful representation – statements must be:
   a. Complete
   b. Free from error
   c. Neutral

Question 12

Conceptual Framework

In addition, the IASB sets out characteristics that enhance the usefulness of accounting information. What are they?

Answer 12

1. Verifiability
2. Understandability
3. Comparability
4. Timeliness

Question 13

What does the term “assumption” mean in connection to the financial statement reporting?

Answer 13

Assumption means that the financial statements are prepared on a going concern basis. The business is going to continue into the future.

Question 14

What does the term “prudence concept” mans in connection to financial accounting and statements?

Answer 14

Prudence concept - We assume the worst possible outcome. Act on the bad news but don’t act on the potential good news.

Question 15

Explain what is meant by the following terms:

Materiality
Neutral
Going Concern

Answer 15

1. Materiality – Important enough to affect a decision made by the user of a financial statement. E.g. an investor. This could be a large amount of money or a small event. E.g., discovery of a fraud by a senior executive
2. Neutral – The financial statements should be free from bias
3. Going Concern – This assumes that the business is going to continue in the future. This means the values of assets and liabilities shown in the financial statements can be assumed to be true and fair. In the event of a liquidation [distressed sale] many assets will be sold for less than their true worth.

Question 16

What is the purpose and objectives of general financial statements?

Answer 16

The purpose of general financial statements is the production of a set of basic financial statements intended to serve a broad group of users for a range of activities, not tailored to any particular information needs.

They capture the cycle of business and provide a report of the financial position (at a specific point in time) or financial performance (over a period of time).

The objective of the financial statements is to provide financial information such as the financial position, financial performance, and cash flows of an entity to help user make financial decisions.

Question 17

What does IAS 1 do?

Answer 17

IAS1 sets of the overall requirements for the presentation of financial statement and prescribes the structure and minimum requirement for the content of financial statements, including overriding concepts such as going concern, the accrual basis of accounting and the current / non-current distinction.

Standards for recognising, measuring, and disclosing specific transactions are addressed in other standards and interpretations.

The objective of IAS1 is to ensure comparability, both with the entities financial statement of previous periods and with the financial statements of other entities.

Question 18

What statements does IAS1 require a company to produce?

Answer 18

1. A statement of financial position (also known as the balance sheet)
2. A statement of profit and loss and other comprehensive income (also known as the income statement)
3. A statement in changes in equity
4. A statement of cash flows
5. Notes to the account

Question 19

Under IAS1, how often must an entity present a complete set of financial statements?

Answer 19

Under IAS1, an entity must present a complete set of financial statements (including prior period comparative information) on at least an annual basis.

Question 20

What does IAS1 provide for the presentation of Comparative Information?

Answer 20

IAS1 requires that comparative information is provided in respect of the previous period for all amounts reporting in the financial statements (both on the face of the financial statements and in the notes – unless another standard requires otherwise).

Narrative and descriptive comparative information is also disclosed where it is relevant to understanding the financial statements of the current period.

Question 21

Why is consistency in the presentation of the financial statements important and under what circumstances is a change justified?

Answer 21

The presentation and classification of the items in the financial statements should be the same from on period to the next.

Consistency is important because of the need for comparability of financial statements.

Changes are allowed either by a change in circumstances or a requirement of a new IFRS.

Any change by either a change of circumstance or a requirement of a new IFRS, must be disclosed.

Question 22

What does a “fair presentation” of financial statements require?

Answer 22

A fair presentation of financial statements require:

1. Selection and application of appropriate accounting policies and practices
2. Presentation of information which is relevant, reliable, comparable and understandable
3. Additional disclosures where required to ensure that the financial statements give a fair representation of the results, financial position and cash flow

Question 23

Under what circumstances is departure from IFRS permitted?

Answer 23

IAS1 acknowledges that, in extremely rare circumstances, departure from IFRS is permitted where compliance with IFRS would conflict with the objective of financial statements, thus misleading the users of financial statement.

Any departure from the IFRS requirement, must be supported with detailed disclosure of the nature, reason and impact of the departure.

Use of an inappropriate accounting policy cannot be rectified either by disclosure of the accounting policies used or by using the notes / explanatory material

Question 24

What are the important principles and overriding concepts that apply in the preparation and presentation of financial statements?

Answer 24

1. Going concern
2. Accrual basis of accounting
3. Reporting period
4. Offsetting

Question 25

Give a brief summary of Going Concern.

Answer 25

The IASB’s Conceptual Framework notes that the financial statements are normally prepared on the assumption that the entity is a going concern and will continue in operation for the foreseeable future.

IAS1 requires management to assess an entity’s ability to continue as a going concern.

The financial statements should not be prepared where there are material uncertainties over the entity’s ability to continue to operate.

IAS1 require such uncertainties to be disclosed, including events that might threaten the future of the entity.

Question 26

Give a brief summary of the Accrual basis of Accounting.

Answer 26

The framework states that financial performance is reflected by accruals – based accounting and this provides a better basis for assessing past and future performance than cash – based information.

Information held in financial statements may be material or relevant simply because of its magnitude or because its omission from the financial statements could affect decision making.

Financial information is capable of making a difference in decision making if it has predictive value, confirmatory value or both.

Question 27

Give a brief summary of Reporting Period.

Answer 27

Where an entities reporting period is changed to less or more than one year, the entity should disclose:
1. The reason for the change.
2. The fact that the comparative figures given are not entirely comparable