Ch 6 - Corporate Governance Flashcards
What is CORPORATE GOVERNANCE?
The means by which a company is DIRECTED and CONTROLLED.
What has driven the need for REGULATION and GUIDANCE on how companies should be operated and the info they disclose?
Corporate Accounting Scandals have driven the need.
What are the different approaches to Corporate Governance?
- Rules based - e.g. US
- Principles based - e.g. UK
Can you explain RULES based approach?
Instils the code into LAW and appropriate penalties for transgression.
Can you explain PRINCIPLES based approach?
Requires the entity to adhere to the SPIRIT rather than the letter of the code.
Corporate Governance Rules suggest COMMITTEES should be used within an entity as control mechanisms by having specialist to co-ordinate, what?
- Internal & external AUDITORS
- Deal with REMUNERATION
- Risk and NOMINATIONS
LEADERSHIP is not a Corporate Governance driven committee
What are the 5 elements of the financial statements?
Assets, Liabilities, Equity, Income & Expenses
How does the IASBs Conceptual Framework define EQUITY?
The residual interest in the assets of the entity after deducting all its liabilities - shows the net amount invested in the business by the owners.
In the accounting equations calculate ASSETS?
Liabilities + Capital
In the accounting equations calculate CAPITAL?
Assets - Liabilities
In the accounting equations calculate LIABILITIES?
Assets - Capital
The IASBs Conceptual Framework identities 2 fundamental qualitative characteristics?
- Relevance
- Faithful representation
The IASBs Conceptual
Framework identifies 4 enhancing qualitative characteristics?
- Caparability
- Verifiability
- Timeliness
- Understandability
How does the IASBs Conceptual Framework define ASSET?
ASSET
a present ECONOMIC RESOURCE controlled by the entity as a result of past events.
Explain an ECONOMIC RESOURCE?
Economic Resource
is a right that has the potential to produce economic benefits
What is the objective of financial reporting?
to provide information about the reporting entity that is useful to users in making decisions relating to providing resources to the entity.
How does the IASBs Conceptual Framework define LIABILITY?
LIABILITY
as a PRESENT OBLIGATION of the entity to TRANSFER an ECONOMIC RESOURCE as a result of past events.
How does the IASBs Conceptual Framework define INCOME?
INCOME
increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims.
How does the IASBs Conceptual Framework define EXPENSE?
EXPENSES
decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders of equity claims.
What 3 elements are used in the accounting equation?
- Assets
- Liabilities
- Capital
Assets - Liabilities = Capital
What accounting statement does the accounting equation form the basis for?
SOFP - Statement of Financial Position (BS)
It therefore demonstrates the relationships that exist within any business entity.
What does Capital Transactions relate to?
Costs incurred that will affect the entity in the long term - could be the purchase of NCA such as buildings, P&M etc
Capital costs will NOT be included as an expense in the SOPL but as a NCA in the SOFP (BS)
What does Revenue Transactions relate to?
Revenue transactions relate to expenses that will only affect the entity in the current ac period, example wages, rent, vehicle running costs.
Revenue expenses will be included as expenses in the SOPL and NOT in the SOFP.
Explain QUALITATIVE characteristic?
Refers to a quality or attribute that describes a thing based on its non-numerical aspects, meaning it cannot be measured with numbers but rather assessed through subjective evaluation. Involves personal judgement.
Explain QUANTITATIVE characteristics?
Expressed as numbers.
The Framework identifies 2 FUNDAMENTAL qualitative characteristics of USEFUL INFO what are they?
- Relevance, also (materiality)
- Faithful representation, also (completeness, neutrality, free from error) see pg 25 in Cert Book.
The Framework identifies 4 ENHANCED qualitative characteristics of USEFUL INFORMATION, what are they?
- Comparability
- Verifiability
- Timeliness
- Understanding
Can you give a brief understanding of MATERIALITY?
According to the Framework, information is material if its omission or misstatement could influence the decisions of users.
Explain COMPARABILITY as an Enhanced Qualitative Characteristic?
Users must be able to compare financial statements over a period of time in order to identify trends in financial position and performance.
In order to achieve comparability, similar items should be treated in a consistent manner from one ac period to the next and from one entity to another.
Explain VERIFIABILITY as an Enhanced Qualitative Characteristic?
Verification can be direct or indirect. Direct verification means verifying an amount through direct observation, counting cash.
Indirect verification means checking the inputs to a model, formula, i.e. recalculating inventory amounts using the same cost-flow assumption such as first-in, first-out method.
Explain TIMELINESS as an Enhanced Qualitative Characteristic?
Timeliness means having info available to decision makers in time to be capable of influencing their decisions. Generally, the older the info is the less useful it becomes.
Explain the Historical Cost Convention?
Normally, transactions are recorded at historical cost. For example, the cost of raw materials purchase from a supplier, or the cost of a machine purchase for use int he business entity as well as sales transactions THEY WILL BE recorded at the agreed monetary value when the transaction takes place.
Explain the reasons / theory behind Capital Maintenance?
Example the entity bought 10,000 widgets for £10 each and sold them for £10.50 you would think there is a £5,000 profit however what if the price of replacing that inventory has gone up by to £11 per widget you now haven’t got a profit and not enough capital to replace inventory. Your business has just SHRUNK. Therefore the historical cost concept overstates profits and understates statement of financial position asset values.
Why is Capital Maintenance therefore important?
It implies profit is only earned if the value of the entity’s net assets or operating capacity has increased during the Ac Period.
With regard to Capital Maintenance what does the Framework make reference to?
FINANCIAL CAPITAL MAINTENANCE :- profit is made only if the financial amount of net assets at the end of the reporting period exceeds the amount at the start of the period
PHYSICAL CAPITAL MAINTENANCE :- profit is made only if the physical productive capacity of the entity exceeds the physical productive capacity at the start of the period.
What are the alternative bases other than historical used for some transactions?
FAIR VALUE :- considered the market value of an item (what price could it be sold
NET REALISABLE VALUE :- this is the estimated selling price of an item, less any further costs that must be incurred to sel the item.
