Chapter 2&3 Flashcards
What are the advantages to having global standards in accounting?
- Improves comparability across countries
- Global business language – improves communication across
countries - Businesses find it easier to raise funds as financial statements
recognised by national stock exchanges - Preparation of group accounts is simpler and less costly
- Improves global decision-making leading to global growth
- Increased global investment
- Less costly to start a business across countries
- Option for countries that do not have their own standards
- Provides legitimacy to businesses from countries that do not have
national standards
What are the disadvantages to having global standards in accounting?
- Threat to national identity
- Treatments in global standards may not reflect national culture
- May not deal with country specific transactions
- Costly to convert from national to global standards
- Costly/onerous for small/medium sized entities
What is the monitoring board in accounting?
- Independent board that appoints the members of the IFRS Foundation Trustees
- Holds the IFRS Foundation Trustees accountable
- Link between representatives of the capital markets worldwide and the IFRS Foundation Trustees.
What is the IFRS Foundation Trustees?
– appoint members of the Board, the IFRS Interpretations
Committee and the IFRS Advisory Council;
– establish and amend the operating procedures, consultative
arrangements and due process for the IASB, the Interpretations
Committee and the Advisory Council;
– review annually the strategy of the Board and assessing its
effectiveness; and
– ensure the financing of the IFRS Foundation and approving
annually its budget
Who is the International
Accounting Standards Board (IASB)?
In 2001 the IASC was renamed the IASB. It is governed by an independent board whose members are appointed by the IFRS
Foundation Trustees. They represent the public interest.
* The IASBs main task is to update IASs and it also issues International Financial Reporting Standards (IFRS)
What is the objective International
Accounting Standards Board (IASB)?
The mission of the IASB is as follows:
“To develop IFRS Standards that bring transparency, accountability and efficiency to financial markets around the world. Our work serves the public interest by fostering trust,
growth and long-term financial stability in the global economy.”
Through other bodies it also strives:
1. To promote the use and rigorous application of those standards.
2. To bring about convergence of national accounting standards and IFRS to high quality solutions.
What helps the IASB achieve its
objectives?
- Board is independent and overseen by a diverse global group of trustees
- Supported by an external IFRS Advisory Council and an IFRS Interpretations Committee
- Adopts a transparent process
- Wide engagement with stakeholders
- Collaborates with the worldwide standard-setting community
What is The International Financial
Reporting Interpretations
Committee (IFRIC)
- Interpretative body of the IASB
- Review current accounting issues not dealt with in the standards
- Issues IFRIC Interpretations (usually covering new issues, or more
guidance on standards when conflict/ambiguity in accounting
treatment occurs)
Who is IFRS Advisory Council?
- Represents stakeholders
- Consultation body for the IASB (advice on the practical application of standards)
- Provides input to the IASB’s agenda, timetable, priorities and also provides advice on projects
- Supports the promotion and adoption of IFRS worldwide
Who are Working groups?
- Called Transition Resource Group
- Established by IASB to assist with the smooth implementation of IFRS.
- Examples (2018)
– TRG for impairment of financial instruments
– TRG for insurance contracts
– TRG for revenue recognition
Part 1 of the Standard setting process?
Setting the Agenda:
- The Board consults the public on its work plan (every five years)
- The IFRS Interpretations Committee may add topics
- Post-implementation reviews by the IASB of standards may identify topics
Part 2 of the Standard setting process?
Research Projects:
- To determine possible accounting problems
- To develop possible solutions and
- To decide whether standard setting is required
- Public views are usually sought via a Discussion Paper
Part 3 of the Standard setting process?
Standard-setting projects:
- Exposure draft with specific proposals is developed and consulted on publicly
- Feedback is debated by the Board before a standard is finalised or amended
Part 4 of the Standard setting process?
- Reviews of new standards are carried out and, if needed, amendments are proposed and consulted on.
- The IFRS Interpretations Committee may publish an interpretation of the standard.
What is Harmonization?
- The first countries to adopt IFRSs were mostly the developing
countries of Africa and Asia – particularly former British colonies - From 2005 all companies whose shares are listed in the EU are
required to prepare their consolidated financial statements in
accordance with IFRSs - By 2018 126 countries have required or permitted use of IFRS
- Convergence project ongoing with the FASB (US accounting
standard setters)
What is a going concern in accounting?
-This concept is the assumption that the business will continue operating into the foreseeable future.
- The implication of this is that assets will normally be valued, and shown in the statement of financial position, at their historical cost (or fair value).
- However, if there is reason to believe that the entity will not be able to continue in business, the assets should be valued on a cessation basis.
- That is, at their net realisable value.
What is the accruals concept?
-The accruals concept is concerned with allocating expenses and income
to the periods to which they relate.
- This means the expenses are matched to the period they were used by
the entity and the income to the period it was earned, as distinctly
different to when cash is paid out for expenses and when cash is
received from a sale.
What is the matching principle
The matching principle refers to the assumption that in the measurement of profit, costs should be set against the revenue which
they generate at the point in time when this arises.
Examples of the matching principle?
For example – Inventory
‘When inventories are sold, the carrying amount of those inventories
shall be recognised as an expense in the period in which the related
revenue is recognised’ (IAS 2, Inventories)
What is an entity concept?
The assumption that the financial statements for an entity represent the transactions of that entity as a unit in its own right and do not
contain any assets, liabilities, income or expenditure that do not relate to the entity.
What is a Materiality concept
- Only material items should be disclosed/presented in financial statements.
- Only apply accounting standards to material items.
What is a time period concept?
- Divides the life of an entity into time periods.
- Users can assume that financial statements represent a period of time, typically one year (company law requires financial statements
to be prepared yearly).
What is a Money measurement concept?
- The information provided in the financial statements is expressed in monetary amounts (typically the currency of the country where the entity is registered).
What is the duality concept?
- Otherwise known as double entry.
- Assumes that every transaction affects two accounts in a set of financial statements in such a manner as to keep the accounting
equation in balance.
What is the Substance over form concept?
- This concept involves identifying all the rights and obligations arising from a transaction or event, and accounting for the transaction or event in a way that reflects its economic substance and not the legal form.
- For example assets obtained on finance leases are legally not owned by an entity – they are hired, yet under this concept, they
are treated the same as assets owned by the entity.
What is the Consistency concept?
- Allows the user to look at a set of financial statements and assume that the same policies, methods and estimation techniques have been used from year to year.
- So performance can be monitored over time and with other entities (all entities disclose how they account for material transactions).
What is the Separate determination concept?
- A user can assume that assets and liabilities and income and expenses have not been netted off against each other, except in
some limited instances, when the substance of the transaction is that it should be netted (for example, trade discounts).
What is Recognition?
- Items should be recognised in the statement of financial position or the statement of Profit or Loss (comprehensive income) if:
– The item meets the definition of an element OR
– The item meets the criteria for recognition
What are elements in accounting?
- Assets
- Liabilities
- Ownership interest (equity)
- Income
- Expenses
What is a Measurement?
- Methods used to determine the monetary value of assets, liabilities, income and expenditure.
What are measurement bases?
- The methods used to determine the monetary value:
– Historical cost
– Current value (market value) - Fair value
- Value in use for assets/fulfilment value for liabilities
- Current cost
What are Historical cost concept?
- Transactions in financial statements reflect the actual cost incurred, or revenue earned.
- The statement of financial position can be regarded as a history of management’s past decision making.
What are accounting policies?
Accounting policies are defined in IAS 8 as: ‘the specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting financial statements.
What are applications of accounting policies?
An accounting policy for a particular type of expenditure may specify:
* whether an asset or a loss is to be recognised;
* the basis on which it is to be measured; and
* where in the statement of profit or loss or statement of financial position it is to be presented.
What are Estimation techniques?
- The methods used to apply accounting policies.
- For example, if it is the policy to depreciate assets, then an estimation technique is the method chosen to depreciate, such as straight line, reducing balance or sum of digits, etc.
What happens when an entity changes accounting policies?
‘An entity shall change an accounting policy only if the change:
* is required by an IFRS; or
* results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows’
What happens if a change to accounting policies are approved?
- Amend the comparatives
- Amend the opening balances for the cumulative impact of the change
- Disclose the reasons for the change
- Disclose the impact on the profit, or loss for the period
- Two years amended comparatives are required under IAS 1 (2018) for the statement of financial position
