Chapter 12: Regulatory Framework

Question 1

What must you annualy disclose to Companies House?

Answer 1

• Financial statements, including the balance sheet and profit and loss accounts
• Disclosures, which are additional notes

Question 2

What is the main piece of legislation relevant to financial reporting? (Hint: It is an act)

Answer 2

Companies Act 2006

Question 3

Which are the names of the two accounting standard which are mandatory?

Answer 3

• IFRS (International Financial Reporting Standards)

- GAAP (Generally Accepted Accounting Principles)

Question 4

What does the UK GAAP consist of the main standards? (3)

Answer 4

FRS 100

FRS 102

FRS 105

Question 5

What does the FRS 100 set out?

Answer 5

The overall reporting framework

Question 6

What does the FRS 102 set out?

Answer 6

Accounting rules for majority of businesses

Question 7

What does the FRS 105 set out?

Answer 7

Accounting rules for “micro businesses”

Question 8

What is the purpose of Accounting Standards?

Answer 8

Outlines a general accounting practice - that a business is expected to follow - for a particular transaction or event

Financial statements that comply with the accounting standards allow common understanding between users

Question 9

What is the scope of Accounting Standards?

Answer 9

Must be followed by Limited companies and LLPs as well as Sole Traders and Partnerships to give a TRUE AND FAIR VIEW of financial accounts.

If the calculation of profits are involved, it must comply with UK GAAP on unincorporated companies.

Question 10

FRS 102: What are the 10 ‘qualitive characteristics’ of information in the financial statements?

(Hint: Think URM ReSPeCCT B)

Answer 10

Understandability
Relevance
Materiality

Reliability 
Substance over form
Prudance
Completeness
Comparability
Timeliness

Benefits over costs

Question 11

FRS 102: What is the definition of an asset?

Answer 11

Resource controlled by the entity

as a result from past events

which will provide future economic benefits

Question 12

FRS 102: What is the definition of a liability?

Answer 12

A present obligation arising from past events

which will result in an outflow of economic benefits from the entity

Question 13

FRS 102: What is performance?

Answer 13

The relationship between income and expenses

Question 14

FRS 102: What is income? (2)

Answer 14

• Transactions and events that increase equity

- other than capital contribution from owners

Question 15

• Sole Traders
• Partnerships
• LLPs
• Company

Which of these can use cash/ accrual basis of accounting?

Answer 15

Sole traders can use cash/ accruals basis of accounting.

Partnerships, LLPs, Companies can only use accruals basis of accounting.

Question 16

In order to recognise an asset, liability, income or expense, what criteria must be met? (3)

Answer 16

DEFINITION
1. It must meet the definition of an asset, liability, income or expense as defined.

ECONOMIC BENEFIT
2. There must be probability that future economic benefit will rise to or from the entity.

VALUE
3. The item must have a cost or value that can be reliably measured.

Question 17

An entity is not allowed to offset its assets to liabilities, and income to expenses. This will affect which 2 characteristics of the information? (2)

Answer 17

• Completeness

- Relevance

Question 18

FRS 102: Define provision

Answer 18

A provision is a liability of uncertain timing or amount

Question 19

What are the size thresholds for a “micro entity”?

Answer 19

• Turnover < £632,000
• Total assets < £316,000
• Average number of employees < 10

Question 20

Where do you account for contingent assets and liabilities?

Answer 20

Disclose as a note to the accounts

Question 21

How many of the size thresholds must an entity meet for it to be classed as a micro entity? (FRS 105)

Answer 21

2 out of the 3 criteria

Question 22

Which accounting concept means that accounts should be prepared in a consistent manner year on year?

Answer 22

Comparability

Question 23

True and/or false?

1. An asset is a resource controlled by the entity as a result of past events and from which economic benefits have flowed to the entity.
2. An expense is a cost to the business, other than distributions to the owners.

Answer 23

1 is false and 2 is true

An asset must be able to generate future economic benefits

‘from which future economics benefits are expected to flow to the entity’

Question 24

Are sole traders required to follow FRS 102?

Answer 24

No