Chapter 12 - Regulatory Framework

Question 1

What is the main piece of legislation relevant to financial reporting?

Answer 1

Companies act 2006

Question 2

What does companies act 2006 require?

Answer 2

companies to prepare the following documents annually for both shareholders and for companies house

• financial statements comprising a balance sheet and p&l
• additional information in the notes to the account known as disclosures
• required to prepare annual accounts which show a true and fair value view of the state of their affairs for the period

Question 3

What does UK GAPP stand for and what standards does it consist of?

Answer 3

Generally Accepted Accounting Principles

• FRS 100
• FRS 102
• FRS 105

Question 4

What is the purpose of FRS 100?

Answer 4

Sets out the overall reporting framework

Question 5

What is the purpose of FRS 102?

Answer 5

• main source of accounting rules for most companies

Question 6

What is the purpose of FRS 105?

Answer 6

Sets out specific accounting rules for micro entities

Question 7

What are the size thresholds for a micro entity?

Answer 7

Entity must meet 2/3 of the following requirements:

• turnover < £632,000
• total assets < £316,000
• avg no. Of employees < 10

Question 8

What is the objective of financial statements?

Answer 8

• to provide information about the financial position and performance of an entity that is useful for economic decision making purposes to a wide range of users

Question 9

In order to meet objectives the info included in the accounts has to have certain qualities or qualitative characteristics, what are these?

Answer 9

• Understandability
• Relevance
• Materiality
• Reliability
• Substance over Form
• Prudence
• Completeness
• Timeliness
• Balance between benefit and cost

Question 10

What is meant by relevance?

Answer 10

• should contain information that is relevant for decision making

Question 11

What is meant by reliability?

Answer 11

• should contain information that is free from material error and bias and is faithfully represented

Question 12

What is meant by understandability?

Answer 12

• should be presented in a way that someone with reasonable knowledge of accounts can understand the financial position of the entity and how well it has performed

Question 13

What is meant by completeness?

Answer 13

• should contain no emissions to ensure that information is reliable and relevant

Question 14

What is meant by balance between benefit and cost

Answer 14

• benefit derived from the information should exceed the cost of providing it

Question 15

What is meant by comparability?

Answer 15

• from the figures presented, a user should be able to assess trends and compare different entities in relation to one another
• accounts should be prepared in a consistent way year on year

Question 16

What is meant by materiality?

Answer 16

• should contain information that is material and therefore relevant. If an item is omitted or misstated it could be a determining factor in influencing the economic decisions made by users

Question 17

What is meant by prudence?

Answer 17

• transactions and events where there is a degree of uncertainty should be recorded using a degree of caution to ensure that income is not overstated or expenses understated

Question 18

What is meant by substance over form?

Answer 18

• transactions and events should be accounted for in accordance with their overall effect and not necessarily their legal form

Question 19

What is meant by timeliness?

Answer 19

• information should be provided to users with no delay and whilst it can still be used to aid their decision making

Question 20

What is the definition of income?

Answer 20

• transactions and events that increase equity other than capital contributions from owners

Question 21

What is the formation of a liability?

Answer 21

• a present obligation arising from past events which is expected to result in an outflow of economic be fits from the entity

Question 22

What is the definition of equity?

Answer 22

• residual interest in the assets of an entity after deducting the liabilities

Question 23

What is the definition of an asset?

Answer 23

• a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity

Question 24

What is the definition of expenses?

Answer 24

• costs and losses of the business, other than distributions to the owners

Question 25

What is a provision?

Answer 25

• liability of uncertain timing and amount

Question 26

When should a provision be recognised on the balance sheet ?

Answer 26

• when there is an obligation at the reporting date as a result of a past event and when it is probable that a transfer of economic benefits will be required to settle the obligation and when the amount of the obligation can be measured reliably

Question 27

What makes a contingent liability different to a provision?

Answer 27

• contingent liability does not meet all of the criteria of a provision

I.e amount cannot be measured reliably

• contingent liability not recognised on the b/s instead disclosed as a note to the accounts

Question 28

What is a contingent asset and how is it recognised?

Answer 28

• if the inflow is probable but not virtually certain this is a contingent asset
• disclosed to users in a note to the accounts