Chapter 1 - Conceptual and regulatory framework

Question 1

What are the attributes that make information provided in the financial statements useful to the users?

Answer 1

The two fundamental qualitative characteristics are:

• relevance
• faithful representation

Question 2

What is the relevance of information affected by?

Answer 2

Its nature and its materiality

Question 3

What principle is implied by the concept of faithful representation?

Answer 3

Substance over form. Transactions must be presented according to their economic substance rather than their legal form.

Question 4

What are the four enhancing qualitative characteristics?

Answer 4

• Comparability
• Understandability
• Timeliness
• Verifiability

Question 5

What does comparability mean?

Answer 5

• Information should be produced on a consistent basis
• the financial statements should be comparable with the financial statements of other entities and the same entity for earlier periods

Question 6

What does timeliness mean?

Answer 6

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

Question 7

What are the five key elements to each set of financial statements?

Answer 7

• assets
• liabilities
• equity
• income
• expenses

Question 8

Contributions from holders of equity relate to what?

Answer 8

Share issues

Question 9

Distributions to holders of equity claims relate to what?

Answer 9

Dividends

Question 10

When an element has been included in the financial statements, what do we say?

Answer 10

That it has been recognised

Question 11

When is recognition allowed?

Answer 11

• The items meets the element definition

- It provides useful information to users (i.e. relevant and faithful representation)

Question 12

What is an asset?

Answer 12

the Conceptual Framework defines an asset as ‘a present economic resource controlled by the entity as a result of past events’.

An economic resource is a ‘right that has the potential to produce economic benefits’ (Framework para 4.2)

Question 13

What is a liability?

Answer 13

the Conceptual Framework defines a liability as ‘a present obligation of an entity to transfer an economic resource as a result of past events’ (Framework, para 4.2)

Question 14

What is equity?

Answer 14

Equity is ‘the residual interest in the assets of the enterprise after deducting all of its liabilities’ (Framework para 4.2)

Question 15

What is income?

Answer 15

the Conceptual Framework defines income as ‘increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity participants’ (Conceptual Framework, para 4.2).

Question 16

What are expenses?

Answer 16

the Conceptual Framework defines expenses as ‘decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to equity participants’ (Conceptual Framework, para 4.2).

Question 17

What do you need to consider the recognition criteria for?

Answer 17

• assets
• liabilities
• income
• expenses

Question 18

What is derecognition?

Answer 18

This normally occurs when the item no longer meets the definition of an asset or liability

Question 19

What is historical cost?

Answer 19

Most assets and liabilities are initially recognised at historical cost.

Assets are recorded at the price that was actually paid to acquire them originally including any relevant transaction costs.

Liabilities are recorded at the proceeds received in exchange for the obligation.

Question 20

What are the advantages and disadvantages to historical cost?

Answer 20

Advantages: the amounts are verifiable, easier to understand and provide consistency in approach.

Disadvantages: inflation movements are not reflected and cost valuations can become out of date quickly.

Question 21

What is measurement at current value?

Answer 21

Current value aims to address some of the disadvantages of historical cost accounting. It provides a few alternative measurement basis:

Fair value – price received to sell an asset or paid to transfer a liability in an orderly transaction.

Value in use – present value of the future cash inflows expected to be generated from an asset, or the future cash outflows expected to fulfil liability.

Question 22

How do you measure an asset and liability at current cost?

Answer 22

Current cost:

Asset – the value is based on the cost of buying an equivalent asset today. It is based on current consideration amounts plus transaction costs incurred. However, estimated adjustments can be made to these amounts to reflect the assets age and condition.

Liability – consideration received for an equivalent liability today minus transaction costs.

Question 23

What is presentation and disclosure?

Answer 23

• Information within the financial statements should be presented and disclosed in a way that effectively communicates all key messages to users
• All disclosures should be relevant and offer a fair representation of the entities position/performance at the reporting date

Question 24

What is the IFRS Foundation responsible for?

Answer 24

• funding

- appointment of members of the Board, IFRS Advisory Council and IFRS Interpretations Committee

Question 25

What is the International Accounting Standards Board responsible for?

Answer 25

• all general technical matters

- the preparation and issue of International Financial Reporting Standards

Question 26

How do you approach ethics in the FAR exam?

Answer 26

1. Which ethical principles are being threatened?
2. Describe the nature of the threat, including a consideration of the parties affected
3. How could this impact the financial statements?
4. What safeguards or actions should be taken to mitigate the ethical issues?

Question 27

What are common ethical scenarios in the FAR exam?

Answer 27

An ethical requirement often revolves around errors in financial reporting treatment identified in an earlier part of the question. Having identified these errors, you should consider the reason for them, and any necessary actions to take.

Question 28

Generally speaking, how do ethical errors occur in the exam?

Answer 28

Generally speaking, errors occur either due to deliberate manipulation of the figures or as a result of a genuine error.

Question 29

What do you do in the case of deliberate manipulation?

Answer 29

You may be able to identify specific incentives, such as a bonus scheme, potential listing, bank covenants or a domineering manager. All of these are threats to the integrity and objectivity of the accountant, and you can describe these using the types of threats (self-interest, intimidation etc)

Question 30

What if the errors are due to genuine mistakes?

Answer 30

We can question the professional competence of the preparer. We may wish to suggest additional training to the relevant individual

Question 31

What should you consider in a question requiring suggested actions?

Answer 31

Should generally think about a process of escalation:

• gather facts to ensure a full understanding of the situation
• discuss with individual affected
• escalate internally, perhaps to a more senior level of management board or audit committee (consider referring to the organisation’s internal procedures if available)
• take external advice from the ICAEW TEAS (technical and ethics advisory services) helpline
• if the matter cannot be resolved, consider resignation

Question 32

Once you implement a certain course of action, you should what?

Answer 32

Always monitor the progress made

Question 33

What do actions include in regard to non-compliance with laws and regulations in the section on Professional Accountants in Business and in Public Practice?

Answer 33

• Always raise issues discovered through the normal day to day work on this area
• any instances of identified/suspected non-compliance with laws or regulations need to be highlighted to managers in a prompt manner

Question 34

What can law and regulations include?

Answer 34

• money laundering
• bribery
• fraud
• data protection
• health and safety
• tax regulations
• environmental laws