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FAR UK GAAP > Ch 1 - Conceptual & Regulatory Framework > Flashcards

Ch 1 - Conceptual & Regulatory Framework Flashcards

1
Q

What 2 concepts does financial accounting consist of?

A
  1. Recording transactions as they take place

2. Summarising all transactions that have taken place in a period of account

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2
Q

Why should transactions be recorded as they take place?

A

To provide up to date info for management

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3
Q

Why should transactions be summarised?

A

Provides useful info about a company for interested parties. It is done through FS preparation

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4
Q

Describe what the bal sheet does

A

Looks at position at 1 point in time

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5
Q

What is the bal sheet known as for IFRS?

A

Statement of Financial Position (SFP)

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6
Q

Describe the statement of comprehensive income?

A

it’s the P&L and other comprehensive income

Looks at performance over the year

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7
Q

What does the statement of cash flows show?

A

Separates operating, financing and investment activities

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8
Q

What are the full set of fin statements made up of?

A
  1. Bal sheet
  2. Stat of comprehensive income
  3. Statement of changes in equity
  4. Statement of cash flows
  5. Notes to the FS
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9
Q

What does the FRC do?

A

It is the body responsible for issuing Financial Reporting Standards (FRSs) in the UK

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10
Q

What does FRS 102 Section 2 Concepts and Pervasive Principles do?

A

Sets out the basic concepts that under-lie the preparation and presentation of the FS

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11
Q

What does FRS 102 Section 2 deal with?

A
  1. The objective of general purpose financial reporting
  2. The qualitative characteristics that determine the usefulness of info in the FS
  3. The definition, recog and measurement of the elements from which the FS are constructed
  4. The concepts of capital and capital maintenance
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12
Q

What is the objective of general purpose financial reporting?

A
  • Provide info to FS users about the financial position and perf of entity to allow them to make economic decisions
  • Usually done by focusing on the needs of investors and potential investors, financial info will also be useful to other users
  • Financial reporting helps man to fulfil its stewardship role
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13
Q

How does financial reporting help man fulfil its stewardship role?

A

Helps them be accountable to SH and other stakeholders for the safe-keeping of the entity’s resources and their proper, efficient and profitable use

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14
Q

Who uses FS and why?

A

Customers (Uphold warranty)
Suppliers (Pay what owed?)
Gvmt (complying with reg/paying correct tax)
Competitors (benchmarking/better strategy)
Stock market analysts and inv (helps w job)
The Public (nosey)
Employees (job security/ pay rise etc)
Management (helps to run bus, targets/payrises)
Investors (likely return)

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15
Q

What are the qualitative characteristics of FRS Section 102?

A 
Understandability
Relevance
Materiality 
Reliability
Substance over form
Prudence 
Completeness 
Comparability 
Timeliness
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16
Q

What is the idea behind understandability?

A

Info must be understandable to users who have reasonable knowledge of bus and acc

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17
Q

What is the idea behind relevance?

A

Fin info is relevant if it helps users’ decision making by

  • Helping them evaluate past, present or future events or
  • Confirming/correcting their existing valuations
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18
Q

What value can relevant info provide?

A
  • Predictive value = helps users in assessing the future of the business
    - But note: still using historic figures
  • Confirmatory value = helps users in confirming past predictions
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19
Q

Why is it important for historic figures to be used for relevant info?

A

As this

  • Removes judgement
  • Note, provisions are the exception, but they are still based on past events
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20
Q

Define materiality

A
  • Info is material if its mission or misstatement could influence the econ decisions of users taken on the basis of the FS
  • Depends on the size and nature of the item or error judge in the circ of its omission or misstatement
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21
Q

What does materiality depend on?

A

Depends on the size and nature of the item or error judge in the circ of its omission or misstatement

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22
Q

Give e.g. of when the nature of materiality may mean the value can be v small

A

If they are close to prof/loss barrier or a loan covenant, smaller items may become more important

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23
Q

Define reliability

A

Free from material error and bias

Faithfully represents effects of transactions and other events

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24
Q

Define substance over form

A

Transactions must be presented according to their economic substance rather than their legal form
Classic example are leases- but act like one, not just be called one

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25
Q

Give an example of using substance over form

A

Leases- act like one, not just be called one

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26
Q

Define prudence

A
  • Caution must be exercised in preparing FS and estimating the outcomes of uncertain events
  • Avoids misleading investors/users
  • Goes against neutrality
    - But justification is that it is better to understate prof than overstate
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27
Q

What is the controversy with prudence?

A
  • Goes against neutrality

- But justification is that it is better to understate prof than overstate

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28
Q

Define completeness

A

Should be complete, subject to the constraints of materiality and cost

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29
Q

Define comparability

A
  • Info should be produced on a consistent basis
  • Consistent presentation is crucial
  • FS should be comparable to FS of
    • Other entities
    • The same entity for earlier periods
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30
Q

What should FS be comparable to?

A
  • Other entities

- The same entity for earlier periods

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31
Q

Define timeliness

A

Info may become less useful if there is a delay in reporting

Note: this is done with reference to the balance between benefit and cost

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32
Q

Which are the most important characteristics of useful financial info?

A

Relevance

Reliability

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33
Q

What are the 5 key elements in each set of FS?

A 
Assets
Liabilities
Equity
Income 
Expenses
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34
Q

Define an asset

A

Resources control by the entity
As a result of a past event
Even w/ a provision
from which future econ benefits are expected to flow to the enterprise
i.e. can use it/sell it
Note: employee’s aren’t assets as you can’t control them

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35
Q

Define a liability

A

Present obligation of an entity
To transfer econ benefits
As a result of past transactions or events

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36
Q

Define equity

A

Residual amount found by deducting all liabilities of the entity from all of the entity’s assets
i.e. the amount owed back to business owners

37
Q

Define income

A

An increase in economic benefits during the accounting period in the form of inflows or enhancements of assets/decreases in liabilities
Transactions that result in increases in equity, other than those relating to contributions from equity participants
i.e. profits/reserves

38
Q

Define expenses

A

Decreases in economic benefits during the acc period in the form of outflows or depletions of assets or increases of liabilities
Transactions that result in decreases in euity, other than those relating to distributions to equity participants

39
Q

When is an asset recognised?

A

It is probable that future economic benefits will flow to the entity
It has a cost or value that can be measured reliably

40
Q

When is a liability recognised?

A

It will result in a probable outflow of econ benefits

The outflow of econ benefits can be measured reliably

41
Q

When is income recognised?

A

An increase in future economic benefits arises from an increase in an asset (or reduction in a liability)
It can be measured reliably

42
Q

When are expenses recognised?

A

A decrease in future econ benefit arises from a decrease in an asset or an increase in a liability
It can be measured reliably

43
Q

What are the 2 measurement bases in FRS 102 Section 2?

A

Historical cost = original cost of asset / proceeds in return for an obligation
Fair value = amount for which an asset could be exchanged, a liability settled or an equity instrument granted between knowledgeable, willing parties in an arm’s length transaction

44
Q

Historical costs =

A

= original cost of asset / proceeds in return for an obligation

45
Q

Fair value =

A

= amount for which an asset could be exchanged, a liability settled or an equity instrument granted between knowledgeable, willing parties in an arm’s length transaction

46
Q

If a company offers a warranty with every washing machine it sells to customers, are the costs of providing this warranty a liability to the company?

A
  • Yes, as they have agreed to the warranty once the sale has been made, so an obligation to incur the costs is made.
  • Providing the company can reliably measure the costs of fulfilling the warranties, the costs should be recognised as a liability
47
Q

What regulations must FS be produced in accordance with?

A

CA 2006
Acc standards (FRS or FRS 100-105)
Note: Companies whose shares or debt are traded on a regulated securities exchange must prepare their FS in acc with IFRS
- But other companies can choose whether to follow IFRS or UK GAAP

48
Q

What must companies whose shares or debt are traded on a regulated securities exchange must prepare their FS in acc with?

A

IFRS

49
Q

What standards have been released by FRC since 2012 to replace UK acc standards?

A

FRS 100: Application of Financial Reporting Requirements
FRS 101 Reduced Disclosure Framework
FRS 102 The Financial Reporting Standard Applicable in the UK and Republic of Ireland
FRS 103 Insurance Contracts
FRS 104 Interim Financial Reporting
FRS 105 The Financial Reporting Standard Applicable to the Micro-entities Regime

50
Q

Why has there been a drive to harmonise global acc standards over the last few decades?

A
  • Globalisation
    - Management of global companies wish for consistent fin reporting across the group
    - Investors are increasingly diversified globally so want to maximise comparability
  • Technology developments
    - Harmonisation has become a more practical possibility
51
Q

Why has globalisation led to harmonisation of acc standards?

A
  • Management of global companies wish for consistent fin reporting across the group
    - Investors are increasingly diversified globally so want to maximise comparability
52
Q

Why has technology developments led to harmonisation of acc standards?

A
  • Harmonisation has become a more practical possibility
53
Q

How have the US and UK worked together to aid convergence?

A

In 2002, the US FASB and the IASB issued the Norwalk Agreement, aiming to encourage harmonisation through the IASB Convergence Project

54
Q

What are the inherent limitations to FS produced?

A

Presentation based upon set formats
Aggregation of info
Backwards looking
Excludes non-fin info

55
Q

What has been released to reduce the impact of inherent limitations to FS?

A

In Dec 2013, the International Integrated Reporting Council (IIRC) released the Integrated Reporting Framework, which aims to communicate the full range of factors that affect an organisations ability to create value over time

56
Q

What guidance has the FRC released based on the Integrated Reporting Framework ?

A

Companies should include info of their

  • Human rights approach
  • Gender representation
  • Greenhouse gas emissions
57
Q

What are the key diffs between profit and non-profit orgs?

A

Profit:
Financial aim is to make prof and increase SH wealth
Directors are accountable to SH
External finance is freely available, e.g. loans/share capital
Non-profit
Financial aim is to achieve value for money/provide a service
Man are acc to trustees/gvmt/public
Finance is limited to donations/gvmt subsidy

58
Q

What are acc standards designed to do?

A

Measure fin perf accurately and consistently
Report the fin position accurately and consistently
Account for the stewardship of the directors of the resources and assets

59
Q

Do non-prof orgs have to produce FS for the public?

A

Often do not have to produce FS for the public

But in many cases may do so

60
Q

What acc measurement standards will be applicable/not applicable to non-prof orgs?

A 
Relevant - those relating to 
- Inventory
- NCAs
- Leases 
Non-relevant - others relating purely to reporting won’t be so relevant
- Such as earnings per share
61
Q

What must not for prof orgs have to comply with?

A

Charities Act 2006

62
Q

To give a good answer in an exam re ethics, what are the questions you should cover?

A
  1. Which ethical principles are being threatened?
  2. Describe the nature of the threat, including a consideration of the parties affected
    Note: if the indiv is a chartered accountant, should follow ICAEW code of ethics
  3. How could this impact the FS?
    Describe the safeguards/actions that should be undertaken
63
Q

What is the ICAEW Code of Ethics based on?

A

International Federation of Accountants (IFAC) Code of Ethics

64
Q

What are the 5 fundamental principles of ethics?

A 
Integrity
Objectivity
Professional competence and due car
Confidentiality 
Professional behaviour
65
Q

Define integrity

A

Prof acc should be straightforward and honest in all prof and bus relationships

66
Q

Define objectivity

A

Prof acc shouldn’t allow bias, conflict of interest or undue influence of others to override professional or business judgements

67
Q

Define prof behaviour and due care

A

Prof acc has a continuing duty to maintain prof knowledge and skill at level required to ensure client/employer receives competent prof service based on current developments in practice, legislation and techniques
Prof acc should act diligently and in acc w/ applicable technical and prof standards when providing prof services

68
Q

Define confidentiality

A

Prof acc should respect confidentiality of info requires as result of prof/bus relationships
Shouldn’t disclose any such info to third parties without proper and specific authority unless there is legal/prog duty or right to do so
Confidential info acquired as a result of prof/bus relationships can’t be used for personal adv of prof acc or third parties

69
Q

Define prof behaviour

A

Prof acc should comply with relevant laws and regs

Must avoid any action that discredits the profession

70
Q

What is the issue with judgement in acc concepts application?

A

Different people exercising their judgement on the same facts could arrive at v diff conclusions

71
Q

Give examples of judgemental areas in acc reporting

A

Valuation of buildings in times of changing property prices
R&D
Brands

72
Q

What must underpin judgements in acc reporting?

A

Ethical principles

73
Q

What does the ICAEW CoE state?

A

Chartered Acc are expected to demonstrate the highest standards of prof conduct and take into consideration and public interest and must maintain the reputation of the acc profession

74
Q

Who does the ICAEW CoE apply to?

A 
Members 
Students
Affiliates
Employees of member firms 
Member firms themselves
75
Q

When must appropriate indivs follow guidance of ICAEW CoE?

A

In all of their prof and bus activities
- Whether carried out with/without reward and in other circa where to fail to do so would bring discredit to the prof
Must follow the spirit as well as the guidance
- i.e. a specific matter being excluded from the guidance doesn’t mean acts don’t have to think about it
- Must determine if the spirit of guidance would also apply in that situation

76
Q

What are the key threats to the fundamental principles?

A 
Self-threat interest
Self review interest
Advocacy threat 
Familiarity threat 
Intimidation threat
77
Q

Define the self-interest threat

A

A financial or other interest of prof acc or of an immediate/close family member will inappropriately influence the prof acc judgement/behav

78
Q

Define the advocacy threat

A

Prof acc will promote a client’s or employer’s position to the point that the prof acc’s objectivity is compromised

79
Q

Define the self-review threat

A

Prof acc won’t appropriately evaluate the results of a prev judgement made by a prof acc

80
Q

Define familiarity

A

Due to long/close relationship with a client/employer, a prof acc will be too sympathetic to the interests/too accepting of their work

81
Q

Define the intimidation threat

A

A prof acc will be deterred from acting objectivity by threats, either actual or perceived

82
Q

When you have identified an ethical error, what must you consdier

A

The reasons for them

The actions necessary

83
Q

Why do errors occur?

A

Deliberate manipulation of figures

Genuine error

84
Q

Give examples of deliberate manipulation of figures

A

Bonus scheme
Potential listing
Bank covenants
Domineering manager

85
Q

What do deliberate manipulation of figures threaten?

A

Integrity

Objectivity

86
Q

What threats are created by deliberate manipulation of figures?

A

Self-interest

Intimidation

87
Q

What does a genuine error threaten in terms of ethics?

A

Professional competence of the preparer

88
Q

How can genuine error in accounts be dealt with?

A

Additional training

89
Q

What actions can be taken to deal with errors found?

A

Gather facts to ensure full understanding of the situation
Discuss with individuals affected
Escalate internally
- E.g. with a more senior level of management, board or audit committee
Take external advice from the ICAEW Ethics helpline
If the matter can’t be resolved, consider resignation

FAR UK GAAP (18 decks)

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