Chapter 1 Conceptual and regulatory framework Flashcards
1.1 Bases of accounting
Accruals basis (transactions recognised when occurred), cash basis (recorded when cash is received) and break-up basis (when intend to sell business, no longer a going concern).
2.1 The Scope of the conceptual framework
This deals with the conceptual framework with:
- The objective of general purpose financial reporting
- The qualitative characteristics the determine the usefulness of information in financial statements
- The definition, recognition, and measurement of the elements from which financial statements are constructed
- The presentation and disclosure of information to ensure that it is effectively communicated
- The concepts of capital and capital maintenance
2.2 The objective of general purpose financial reporting
The objective of general purpose financial reporting is to provide information about the entity that is useful to stakeholders. Focusing on needs of investors and potential investors means the report usually is useful for others. Financial reporting helps management fulfil its stewardship role (managements accountability to shareholders).
2.3 User groups
The conceptual framework states existing/potential investors, lenders and other creditors are primary users of financial statements. Users should consider information relating to industry trends, political climate, and economic conditions. Other users of the financial statements include customers, suppliers, government, competitors, stock market analysts and advisers, the public, employees, and management.
2.4 Qualitative characteristics of financial information
The conceptual framework identifies two fundamental qualitative characteristics of relevance and faithful representation. Relevance is affected by nature (relevant if it is capable of making a difference in the decisions of users, that may be predictive or confirmatory value) and materiality (information is material is the misstatement or omission could influence the economic decisions of primary users).
Information must faithfully represent the effects of transactions and events and be complete, neutral, and free from error:
- Completeness: statements complete, subject to constraints of materiality and cost
- Neutrality: judgements without bias, subject from prudence
- Free from error: complete accuracy is not possible, but estimates disclosed
- Prudence: caution exercised in preparation and estimating outcome of uncertain events
- Substance over form: presented according to economic substance not legal form
The conceptual framework also identifies four enhancing qualitative characteristics:
- Comparability: information produced on consistent basis and comparable with other entities and previous periods
- Understandability: information understandable to users with reasonable knowledge of business and economic activities
- Timeliness
- Verifiability: different knowledgeable and independent observers could reach consensus, that a particular depiction is a faithful representation
2.5 Elements of financial statements
Conceptual framework identifies 5 key elements to each set of financial statements:
- Assets: present economic resource controlled by entity as a result of past events and has potential to produce economic benefits
- Liability: present obligation to transfer an economic resource as a result of past events, the obligation is one where the entity has no practical ability to avoid
- Equity: residual interest in the assets of the entity after deducting all liabilities
- Income: increases in assets or decreases in liabilities that result in increases in equity other than those relating to distributions to holders of equity claims
- 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
2.6 Recognition
The conceptual framework allows recognition if the item meets the element definition, and it provides useful information to users. The benefits of providing the information and the costs of recognition should be evaluated. Derecognition occurs when the item no longer meets the definition of an asset or liability.
2.7 Measurement
Two main bases of measurement by the conceptual framework:
- Historical cost: obtained from the original transaction price. This means amounts are verifiable, easy to understand and are consistent. This does mean inflationary movements are not reflected.
- Current value: price needed to pay now. It provides a few measurement basis including fair value (price received to sell an asset or paid to transfer a liability in an orderly transaction), value in use (present value of future cash inflows expected by an asset, or future outflows expected to fulfil a liability) and current cost (asset use cost of equivalent asset or liability is consideration received for equivalent liability minis transaction costs).
3.1 International regulatory framework
The bodies involves in international regulation are the IRIS foundation responsible for funding and appointment of members of the Board, IFRS Advisory Council and IFRS Interpretations committee and the international accounting standards board responsible for general technical matters and the issue of international reporting standards. The advisory council and interpretations committee support the board.
4.1 Convergence
There has been a drive to harmonise global accounting standards as a result of globalisation and technology developments. The EU requires the adoption of IFRS standards for the consolidated financial statements of any entities whose debt or equity are traded in a regulated market.
5.1 Limitations of financial statements
Limitations include presentation based upon set formats, aggregation of information, backward looking and exclude non-financial information. The FRC issued guidance that companies should include information of their human rights approach, gender representation and greenhouse gas emissions.
6.1 ICAEW Code of ethics – fundamental principles
- Integrity: straightforward and honest in all professional relationships. Not knowingly mislead information
- Objectivity: not allow bias, conflict of interest or undue influence of others to compromise judgements
- Professional competence and due care: duty to maintain professional knowledge and skill to ensure a client receives competent services based on current developments. Act diligently in accordance with technical and professional standards when providing services
- Confidentiality: must not disclose any information outside the organisation without authority. Unless there is a duty or right to disclose, or disclosure is within the public interest and permitted by law. Exceptions to this include quality review by professional body, response to an investigation, disclosure required by law, during legal proceedings and compliance with technical and professional standards.
- Professional behaviour: comply with relevant laws and regulations and should avoid any conduct that is known or might discredit the profession.
6.3 Accounting concepts and individual judgement
Figures in the financial statements may be derived from the application of judgement in applying accounting concepts. Areas of judgement could be valuation of buildings in times of changing property prices, research and development costs and brands. Judgement in accounting matters should be underpinned by ethical principles.
6.4 Threats to fundamental principles
- Self-interest threat: financial or other interest inappropriately influenced judgement or behaviour (threats to all 5)
- Self-review threat: not appropriately evaluate the results of a previous judgement made completed by the accountant (threats to objectivity and confidentiality)
- Familiarity threat: due to long or close relationship, the accountant becomes too sympathetic to their interests or too accepting of their work (threats to all 5)
- Intimidation threat: accountant deterred from acting objectivity by threats (threats to objectivity, professional behaviour, and integrity).
6.5 Non-compliance with laws and regulations
Actions to respond to non-compliance issues and regulations include always raising issues discovered through the normal day to day work on this area and any instances of suspected non-compliance with laws or regulations need to be highlighted to managers in a prompt manner. Laws and regulations can include money laundering, bribery, fraud, data protection, health and safety, tax regulations and environmental laws.
