Chapter 1 - Reporting framework, sustainability and ethics Flashcards
What is the main purpose of financial statements?
To provide financial information to external users
In the UK, who are required to produce financial statements?
In the UK, all companies must comply with the provisions of the Companies Act 2006 (CA 2006): and are required to prepare financial statements which give a true and fair view.
Unincorporated entities are exempt from the above requirements but may need to follow other regulation, eg charities must comply with the Charities Act.
Which two standards must financial statements be prepared by?
The individual (and some group) financial statements may be prepared:
* in accordance with the CA 2006 (as regards format and additional information provided by way of notes),
or
* in accordance with international financial reporting standards (IFRS Standards).
What are the key limitations to financial statements? (4)
Financial statements:
* are backward-looking
* exclude non-financial data
* are highly standardised
* contain aggregated information
However, some of the limitations of financial statements are addressed in the non-financial information which is often provided along with the financial statements, such as operating and financial reviews and the Chairman’s statement.
What is the Conceptual Framework for Financial Reporting?
The Conceptual Framework sets out the fundamental concepts for financial reporting that guide the IASB in developing IFRS Standards
What are the purposes of the Conceptual Framework? (3)
- to assist the IASB to develop IFRS Standards that are based on consistent concepts
- to assist preparers of financial statements to develop consistent accounting policies when no IFRS Standard applies to a particular transaction or event where a standard allows a choice of accounting policy
- to assist all parties to understand and interpret IFRS Standards
According to the Conceptual Framework, what is the objective financial reporting?
‘The objective of general purpose financial reporting is to provide information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.’
These users need information about:
* the economic resources of the entity
* the claims against the entity
* changes in the entity’s economic resources and claims
According to the Conceptual Framework for Financial Reporting, what are the qualitative characteristics that make financial information useful? (2-5)
Fundamental characteristics - must haves
* Relevance (nature, materiality) - have to have predictory and confirmatory value
* Faithful representation (complete, neutral, free from error, substance over form)
Enhancing characteristics - would be good to have
* Comparability - i.e. comparison between periods, different entities
* Verifiability - two people must be able to come to the same conclusion
* Timeliness - produced within a timeframe that is useful and relevant
* Understandability - understandable to an informed person (someone with basic knoweledge of accounting)
* cost vs benefit - the benefits of providing financial information should justify the costs incurred to produce and use it.
According to the Conceptual Framework, what are the ‘account basis’ allowed? Define each (2)
- Accruals basis - records income and expenses when they are earned or incurred, regardless of when cash is received or paid
- Going concern basis - assumes that an entity will continue operating for the foreseeable future, typically a period of at least 12 months, and is not in imminent danger of liquidation or ceasing operation
According to the Conceptual Framework, what are the key elements of financial statements? Define each (5)
In the Conceptual Framework, what is meant by recognition and derecognition of the key elements of financial statements?
The item meets the definition of an element, and
Recognition of that element provides users with information that is useful, ie it provides
* relevant information about the element
* a faithful representation of the element
Derecognition normally occurs when the entity
* loses control of an asset;
* or no longer has a present obligation for a liability
According to the Conceptual Framework, what are the different measurement bases for values? Define each (5)
- Historical cost - the original price paid for an asset
- Current value - the asset’s current market value, this can take one of three values
* fair value – the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
* value in use - the present value of the expected future cash flows that an asset in its current condition will produce
* current cost - the amount that an entity would pay to acquire the asset or incur the liability at current market prices
Using the helpful acronym, what are the fundamental ethic principles? Define each (5)
PIPCO
What are the common threats to the fundamental ethics principles? Define each (5)
- Self-interest threats – Arise when personal or financial interests unduly influence an accountant’s judgment.
- Self-review threats – Occur when an accountant evaluates their own previous work, risking bias or errors.
- Advocacy threats – Happen when an accountant promotes a client’s position, compromising objectivity.
- Familiarity threats – Emerge from close relationships with a client, leading to a lack of professional skepticism.
- Intimidation threats – Occur when an accountant is pressured or coerced into unethical behavior.
What are the two types of safeguards that can be put in place to limit threats to the ethical principles? Give examples of both
SUSTAINABILITY
REGULATORY FRAMEWORK
CONVERGENCE OF ACCOUNTING STANDARDS
