Chapter 12 - Regulatory Framework Flashcards
What is the main piece of legislation relevant to financial reporting?
Companies act 2006
What does companies act 2006 require?
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
What does UK GAPP stand for and what standards does it consist of?
Generally Accepted Accounting Principles
- FRS 100
- FRS 102
- FRS 105
What is the purpose of FRS 100?
Sets out the overall reporting framework
What is the purpose of FRS 102?
- main source of accounting rules for most companies
What is the purpose of FRS 105?
Sets out specific accounting rules for micro entities
What are the size thresholds for a micro entity?
Entity must meet 2/3 of the following requirements:
- turnover < £632,000
- total assets < £316,000
- avg no. Of employees < 10
What is the objective of financial statements?
- 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
In order to meet objectives the info included in the accounts has to have certain qualities or qualitative characteristics, what are these?
- Understandability
- Relevance
- Materiality
- Reliability
- Substance over Form
- Prudence
- Completeness
- Timeliness
- Balance between benefit and cost
What is meant by relevance?
- should contain information that is relevant for decision making
What is meant by reliability?
- should contain information that is free from material error and bias and is faithfully represented
What is meant by understandability?
- 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
What is meant by completeness?
- should contain no emissions to ensure that information is reliable and relevant
What is meant by balance between benefit and cost
- benefit derived from the information should exceed the cost of providing it
What is meant by comparability?
- 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
What is meant by materiality?
- 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
What is meant by prudence?
- 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
What is meant by substance over form?
- transactions and events should be accounted for in accordance with their overall effect and not necessarily their legal form
What is meant by timeliness?
- information should be provided to users with no delay and whilst it can still be used to aid their decision making
What is the definition of income?
- transactions and events that increase equity other than capital contributions from owners
What is the formation of a liability?
- a present obligation arising from past events which is expected to result in an outflow of economic be fits from the entity
What is the definition of equity?
- residual interest in the assets of an entity after deducting the liabilities
What is the definition of an asset?
- 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
What is the definition of expenses?
- costs and losses of the business, other than distributions to the owners
What is a provision?
- liability of uncertain timing and amount
When should a provision be recognised on the balance sheet ?
- 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
What makes a contingent liability different to a provision?
- 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
What is a contingent asset and how is it recognised?
- if the inflow is probable but not virtually certain this is a contingent asset
- disclosed to users in a note to the accounts
