Chapter 2 - Test your knowledge Flashcards
What is the role of a regulatory framework in the preparation of financial statements?
The purpose of the Conceptual Framework is:
a) to assist the IASB in the development of future IFRS and in its review of existing IFRS;
b) to assist national standard setting bodies in developing national standards;
c) to assist preparers of financial statements in applying IFRS and in dealing with topics that are not covered by a standard or where there is choice of accounting policy;
e) to assist users of financial statements in interpreting the financial
statements prepared in compliance with IFRS;
g) to provide those who are interested in the work of the IASB with information about its approach to the formulation of IFRS
Why is there a need for businesses to prepare financial statements for their users?
The key benefits of preparing financial statements for their users are listed
below…
1) Investors: financial statements help investors to decide about buying or selling shares by providing information about the level of dividend and any changes in share price. It also helps investors to see the company’s prospects, present liquidity position and how the company’s shares compare with those of its competitors.
2) Employees and management: company performance is related to the security of employment and future prospects for jobs in the company. The financial position and performance help management in managing the business.
3) Lenders: the information in the financial statements help lenders decide whether to lend to a company. This information is checked for adequacy of the value of security, ability to make interest and capital repayments and to ensure financial covenants have not been breached.
4) Suppliers: are interested in information to assess whether the company will be a good customer and pay its debts.
5) Customers: the company should be in a good financial position to be able to continue producing and supplying goods or services
Briefly explain the meaning of faithful representation.
Faithful representation means that financial information must meet three criteria:
completeness, neutrality and be free from error.
1) Completeness: all information that users need to understand the item is given.
2) Neutral or unbiased: there is no bias in the selection or presentation of information.
3) Free from error: there are no omissions, errors or inaccuracies in the
process to produce the information.
The idea of ‘substance over form’ is key for the faithful representation of
financial information.
It may be necessary to override the legal form of a transaction to portray a true economic position
Management commits to purchase assets in the future. Does this give rise to a liability?
It is important to distinguish between a present obligation and a future commitment.
A management decision to purchase assets in the future does not,
give rise to a present obligation. It is rather a future commitment
Explain how you would report a transaction that fails to satisfy the
recognition criteria?
Where an essential element is not recorded as an asset, liability, income or expense because it is unable to meet the criteria for recognition, it can be disclosed in the form of explanatory notes if the knowledge would be relevant to the users of the financial report in making and evaluating their decisions.
The revised recognition criteria refer explicitly to the qualitative characteristics of useful information.
Explain the most commonly used measurement in financial
statements
Historical cost is the measurement basis most commonly used today.
It is usually
combined with other measurement bases. Examples of this include:
1) assets on finance leases are to be carried at the lower of:
– fair value at the date of its acquisition; or
– discounted value of the minimum lease payments at that date
2) construction contracts shall be carried at historical cost plus a proportion of the expected profit;
3) inventories are also measured as per IAS 2 at the lower of cost and net realisable value.
Consideration of different factors is likely to result in different measurement bases for different assets, liabilities, income and expenses.
The factors to be considered when selecting a measurement basis are relevance and faithful representation, because the aim is to provide information that is useful to investors, lenders and other creditors
The advantages of adopting IFRS?
Advantages
- Financial statements presented under IFRS make global comparisons easier.
- Cross-border listing is facilitated, making it easier to raise funds and make investments abroad.
- Multinational companies with subsidiaries in foreign countries have a common, company-wide accounting language.
- Foreign companies can be more easily appraised for mergers and acquisitions.
- Multinational companies benefit for the following reasons:
– preparation of group financial statements may be easier;
– a reduction in audit costs might be achieved;
– management control would be improved; and
– transfer of accounting knowledge and expertise across national borders would be easier
The disadvantages of adopting IFRS?
Disadvantages:
- The cost of implementing IFRS.
- The lower level of detail in IFRS.
- International Financial Reporting Standards are principles-based standards which require the application of judgement.
Many do not favour this approach. For example, US GAAPs are more rules-based standards. US accountants are subject to a high degree of litigation and their defence is usually that they complied with the relevant sections of detailed standards which make up US GAAP. They fear that adoption of IFRS will remove this defence.
- There are challenges in adopting IFRS in emerging economies, namely:
– the economic environment;
– incompatible legal and regulatory environments;
– concern around SMEs;
– level of preparedness; and
– education needs of auditors
What are the Barriers to Global Harmonisation?
- Legal system:
This affects the accounting standardisation process – such as whether the legal system is based on common law or code law. The differences in the legal system can restrict the development of certain accounting practices.
- Business financing and accounting practices:
Decision-making processes regarding arrangement of funds may include accounting practices. Many countries do not have strong independent accountancy or business bodies which would press for higher standards and greater harmonisation.
- Tax system: a country’s tax system is very influential, particularly in terms of its connection with accounting. In most countries, tax authorities may influence the accounting rules around recording of revenues and expenses.
- Level of inflation:
This is likely to influence valuation methods for various types of assets.
- Political and economic relationships:
While Commonwealth countries may share similarities in their accounting and tax systems, cultural differences may still result in accounting systems differing from country to country.
In addition, developing countries may have less developed standards and principles, although this is not always the case. Some countries may be experiencing unusual circumstances (civil war, currency restrictions) which affect all aspects of everyday life.
Others may resist the adoption of ‘another country’s standard’ for nationalism reasons.
What is Environmental reporting?
Environmental reporting is the process of communicating the environmental effects of an organisation’s economic actions
through the corporate annual report or a separate environmental report.
The demand for environment-related information
has led to pressures on corporations, requiring them to make a plethora of disclosures (such as information on policy, procedures and processes and the environmental audit report).
Explain 5 Environmental reporting implications?
Explain 5 Environmental reporting implications?
- Risk management:
Financial, legal and reputation implications.
- Marketing advantages:
public image and brand enhancement by demonstrating environmental responsibilities.
Businesses that are considered environmentally irresponsible are likely to lose market share.
- Legal needs:
a business may be legally required to provide environmental reports. It is a legal requirement for quoted companies and those that carry on insurance market activity.
- Competitive advantage:
it can improve relationships with key stakeholders such as investors, suppliers and the wider community. Improved environmental performance should lead to cost savings
- Ethics:
showing a commitment to accountability and transparency.
List 5 of the Environmental reporting implications?
- Risk management
- Marketing advantages
- Legal needs
- Competitive advantage
- Ethics
What are Environmental management systems?
What are Environmental management systems?
An environmental management system (EMS) is a management system and database designed to implement and maintain policy for environmental protection.
It integrates:
- organisational structure
- planning activities
- processes and procedures for training of personnel
- implementing, monitoring and maintaining of environmental policy
- reporting of specialised environmental performance to internal and external stakeholders
What is the most commonly used EMSs?
What is the most commonly used EMSs?
The most widely used standards on which EMSs are based is the International Organization for Standardization (ISO) Standard 14000 and the European Union’s Eco-Management and Audit Scheme (EMAS)
ISO 14000 is an industry-led standard related to environmental management that requires companies to document and work towards reducing or eliminating pollution and processes that can be harmful to the environment. The requirements of ISO 14000 are an integral part of EMAS, although EMAS includes some additional requirements.
What is the The EU Eco-Management and Audit Scheme (EMAS)?
The Eco-Management and Audit Scheme is a voluntary environmental management tool specifically designed for eco-management audits.
It allows a company to assess and identify the full extent of its environmental impact and continuously improve and manage its environmental performance.
The scheme is globally applicable and open to all types of private and public organisations that meet the requirements of the
EU EMAS regulation.
